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TMI Blog2012 (7) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.0. The learned Commissioner of Income-tax (Appeals) further erred in law and on facts in not appreciating the fact that the reasons recorded did not give rise to a bona fide belief that any income for the A.Yr.1996-97 had escaped the assessment and therefore the notice u/s.148 was invalid and bad in law. 3.0 The learned Commissioner of Income-tax (Appeals) erred in law and on facts in holding that the ground relating to preliminary objection taken by the appellant is not maintainable. 2.1. At present, the assessment order challenged before us is passed u/s.143(3) r.w.s. 254 of IT Act dated 26/12/2008. We have been informed that the Respected ITAT vide order dated 11/4/2007 [in ITA Nos.1835 & 1836/Ahd/2003 for AYs 1996-97 & 1998-99] has set aside the issue of reopening of assessment back to the file of AO with the direction to provide the reason recorded for reopening of the assessment. In this context, our attention was drawn on paragraph Nos.2 & 5 of the said order of the Tribunal; reproduced below:- "2. Since both these grounds are interconnected, they are being disposed off together for the sake of convenience. The grievance of the assessee in the above grounds of appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived. Another letter was issued on 26/11/99 but no reply was received. Summons u/s.131 of the Act were issued to the party for furnishing the details. In response to the summons the party attended and filed the details. It is seen that the transaction of the assessee with the party tallies to the extent of the amount of bill and the payments made by the assessee. However, the opening balance does not tally. It is also seen that the party has closed the account at the year end by transferring the balance of Rs.84960/- to the Discount account while in the books of the assessee a balance of Rs.29,320/- is shown as outstanding. Since the expenditure claimed by the assessee and the payment made during the year tallies no addition is made in the current year. However the assessment for A.Y. 1996-97 is required to be reopened which is being reopened separately. On the basis of above, I have reason to believe that income chargeable to tax for A.Y. 96-97 has escaped assessment and therefore, the assessment is required to be re-opened as per the provisions of Section 147 of the Act. Issue notice u/s.148 of the Act." 3.2. Further, our attention was drawn that the entire portion of reasons r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contested that at that point of time the assessee has demonstrated to the Tribunal that no reasons were in fact handed over to the assessee, on the other hand, Revenue could not be in a position to establish that "reasons recorded" were actually given to the assessee. 5. We have heard both the sides at some length. On careful examination of the contents of page 18, it is evident that the transaction which was recorded in the main paragraph did not relate to the A.Y. 1996-97, the year which was reopened and now under this appeal. Rather, as per the balance-sheet for the accounting period ended on 31st of March-1997, the outstanding balance of Yogi Construction Co. was recorded at Rs.29,320/-. Meaning thereby, presumably had there was any discrepancy, that too had its effect for A.Y. 1997-98. This amount was alleged to have been wrongly taxed for A.Y. 1996-97 in the impugned order though the said closing balance did not belong to the accounting period as also the year under consideration. In that paragraph, we have also noticed that the Revenue Department has issued notice u/s.133(6) of IT Act but it was dated 30/09/1999. Later on, an another notice was issued on 26/11/1999 and sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balances the AO has believed that some income has escaped the assessment. The Hon'ble Gujarat High Court in the case of Bakulbhai Ramanlal Patel(supra) has made an observation as follows:- "20. Reading the reasons recorded in their entirety, there is nothing whatsoever to indicate as to which is the income that has not been disclosed by the petitioner or that any income chargeable to tax has in fact escaped assessment. The entire tenor of the reasons recorded indicates that on the basis of some unsubstantiated and vague information, the AO has reopened the assessment for the purpose of making a roving and fishing inquiry to verify as to whether any income has in fact escaped assessment which fact is borne out from the reasons recorded, wherein the AO has categorically recorded thus : "In view of the above facts and circumstances of the case, detailed investigation/ verification is required and it is also required to bring the assessee in tax net." Insofar as bringing the assessee in the tax net is concerned, the petitioner admittedly has filed return of income and has been assessed in respect thereof, the petitioner is, therefore, already within the tax net. Since the reasons reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The material, which is referred by the Hon'ble Supreme Court, should be of such nature so that prima-facie an opinion can be found for reopening of the assessment. Undisputedly, in the light of this verdict the sufficiency and the correctness of the material are not to be considered but this stage come a little later because prior to this stage AO is required to form an opinion that there is a material related to the year under consideration. In the present case, as per the reasons recorded the AO was not even convinced that the material on which he had placed reliance was in fact related to the assessment year in question. Ld.DR has also placed reliance on Kalyanji Mavji & Co.(supra) and in that decision the reassessment was within four years and the Hon'ble Court has said that the word "information" is of the widest amplitude and comprehends a variety of factors. Immediately thereafter the Court has said, quote "The word " information " in section 34(1)(b) is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under section 34(1)(b), however wide it may be, is not plenary because the discretion of the Income-tax Officer is controlled by the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year)." "32. The result of the aforesaid discussion is, that the question framed, in the order dt. 23rd May, 2006, is required to be, and is, answered in the manner, that the Tribunal was not justified in holding, that the proceedings for reassessment under s. 148/147 were initiated by the AO, on non- existing facts, because ultimately the assessee has been able to explain the income, which was believed to have been escaped assessment, was explainable. It is further held, that the AO was justified in initiating the proceedings under s. 147/148, but then, once he came to the conclusion, that the income, with respect to which he had entertained "reason to believe" to have escaped assessment, was found to have been explained, his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of the proceedings, which were found by him, to have escaped assessment." On due con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on the assessee. There is one more possibility that the account with the said party might have been settled in the subsequent years but for the year under consideration it could not be held with certainty that there was cessation of liability as far as the assessee is concerned. Since it was not justifiable to hold with certainty that the liability had ceased to exist for the year under consideration, hence it was wrong on the part of the AO to allege that the assessee had failed to reduce its expenses. We therefore disapprove such a presumptive addition. Therefore, we hereby direct to delete the addition. Therefore on the both the counts, first, that the reopening was bad in law and, second, on merits the addition was also uncalled hence deleted. In the result, assessee's appeal is partly allowed. 7.4 Before we proceed to decide the merits of the addition for A.Y. 1996-97 it is worth to mention that although we have invalidated the reopening but for the sake of completeness, as also suggested by some Hon'ble Courts to adjudicate the merits as well to avoid future litigation in case the view on the validity gets reversed , we herein below proceed to decide the merits of the quan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.10,89,382/- had to be incurred in this year. Then material for special job-work had to be purchased this year at a cost of Rs.14,24,894/-. If we consider these three items of extra expenditure separately this year, then the gross profit this would work out to about 40% this year as compared to the gross profit shown at 29.9% and 20.54% shown in preceding two years. Along with this letter the firm had submitted comparative position of receipts and items of expenditure for the A.Yrs. 1994-95, 1996- 97, 1998-99 and 1999-2000 so that the reasons for variations in G.P. from year to year could be appreciated by the A.O. Unfortunately, this explanation was not taken into consideration by the then A.O. while passing the assessment order for all these years in which the book result was rejected and G.P. was estimated @ 30% on the receipts shown by the firm." 8.2. However, the AO was not convinced and he has adopted the GP ratio at 30%, which was worked out at Rs.44,53,572/- by applying the said ratio on the total receipts of Rs.1,48,45,243/-. As against that, the GP shown by the assessee was only Rs.23,11,228/-, therefore the difference of Rs.21,42,344/- was taxed. 9. When the matter w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 26.33 Accordingly the gross profit works out to Rs.32,68,922 (22.02% of Rs.1,48,45,243). The appellant has already shown gross profit at 15.56% which comes to Rs.23,09,919. The GP addition thus works out to Rs.9,59,003 (Rs.32,68,922 - Rs.23,09,919). The appellant gets relief of Rs.11,83,341 (Rs.21,42,344 - Rs.9,59,003)." 10. From the side of the Revenue, ld.Sr.DR Mr.Samir Tekriwal has contested that the GP addition was made primarily on the ground that the assessee had failed to furnish the complete details. The AO noticed that payments made to laborers were through bearer cheques. The impugned addition of GP, in the opinion of ld.DR was therefore, on account of infringement of the provisions of section 40A(3) of IT Act as well. 11. Having heard the submissions of both the sides, we have noticed that the assessee had filed Audit Report of its accounts u/s.44AB of IT Act. There was no particular findings of the AO in respect of any defect found in the said audited accounts or in the books of accounts. As far as the details of the impugned expenditure is concerned, it is evident from page Nos.5 & 6 of CIT(A) that the requisite party-wise details was very much on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than a mere suspicion to support the assessment. He must take into consideration local information and repute in regard to the assessee's circumstances, and his own knowledge of previous returns and of other matters necessary to assist him in arriving at a fair and proper estimate. Low profit in a particular year is itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The system of accounting adopted by the assessee cannot be rejected on the ground that the gross profits were low and compared unfavourable with those of others. It is settled law that the tax authorities having relied on one part of the transactions cannot reject the other part. In the instant case, the AO adopted the P&L a/c for the preceding year and, yet, borne a doubt about the other part. This appears to be a case of mere suspicion. Without recording a finding that the vouchers in regard to purchase of raw materials have been manipulated or otherwise not acceptable, the AO ought not to have gone for best judgment. It is well known that in case of transactions in cash, the purchaser and the seller often do not bother to keep details of thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejecting of books of accounts and directing the Assessing Officer to estimate gross profit @ 20.89% instead of 30% taken by the Assessing Officer. 12.1. As per the assessment order passed u/s.143(3) r.w.s.254 of the IT Act dated 26/12/2008, it was noted by the AO that the assessee-firm is engaged during the year in the business of excavation on contract basis for different parties. The AO has reproduced the reply of the assessee and almost in identical manner applied the GP ratio at 30% for the year under consideration as well. The matter was carried before the first appellate authority who has held as under:- "After going through rival submissions the AO is directed to delete GP addition because he has not pointed out single defect in the books of account in the year under consideration. It is well know that each year for Income tax purposes is a separate year and the AO could not have pasted the stand taken by him in AY 1996-97 mechanically in AY 1998-99 also. Surprisingly the AO has neither bothered to issue a show cause notice before rejecting the accounts of the appellant firm. Application of GP rate at 30% on receipts has been made by the AO without bringing any material o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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