9911796707
TMI Blog2002 (9) TMI 854X X X X Extracts X X X X X X X X Extracts X X X X ..... issue by the learned CIT(A). 3. An action under s. 132(1) was carried on the appellant on 14th March, 1995, and books of accounts and various documents were found and seized. The appellant is engaged in the business of undertaking the works contract project of Indian Railways on turnkey basis having specialisation in installation of colour light signalling system at the railway stations. The assessee also has undertaken the activity of manufacturing and sale of EPABX system at Jaipur in the year under consideration. The return of income has been filed declaring an income of ₹ 88,91,700. The accounts are audited and were accompanied by report of auditors. As per audited accounts, the assessee disclosed a net profit rate of 3 per cent which the AO has assessed at 11 per cent by rejecting the books of account under s. 145(2) of the IT Act. Depreciation has been allowed thereon but claim of deduction of interest has been denied to the assessee. The learned CIT(A) has given a finding that after being cornered by the Department, the appellant agreed to an application of net profit rate of 11 per cent and thus the estimation of income at ₹ 2,23,38,143 has been upheld by him a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of accounts maintained by the appellant and for applying an exorbitant high net profit rate of 11 per cent. These are appraisal report prepared by the Directorate of Investigation Income-tax, and audit report procured under s. 142(2A) of the IT Act. The AO himself has given a finding that appellant could justify only a few transactions but remaining not. The details of the same have not been brought on record by him. He has also not brought on record the total payment about whom he was not satisfied or not given by the appellant. A reference was drawn to the order sheet entry dt. 7th Aug., 1998, etc. The learned counsel vehemently argued that audit was not carried in a proper manner. Certain areas were not covered by the audit and so much so the vouchers and other relevant material from which the AO's queries could be satisfied were lying seized by the Department but neither the AO cared to supply the same to the auditors nor the auditors felt duty-bound to take inspection thereof from the Department before furnishing report of the special audit. The AO offered to apply a net profit rate more than 11 per cent but the assessee gave a conditional proposal which was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account Shri Ram Arora vs. CIT (1971) 80 ITR 78 (All). Expenditure claimed not actually incurred cannot be basis for rejecting books of accounts. Uttam Chuna Pathar Udyog vs. ITO (1998) 65 ITD 460 (Jp). Simply, a clerical error, lack of some vouchers, non-maintenance of a particular record does not per se render the accounts incorrect. M. Durai Raj vs. CIT (1972) 83 ITR 484 (Ker). Low rate of profit declared in comparison to others is no reason for rejection of books. R.B. Jessaram Fetehchand (Sugar Dept.) vs. CIT (1970) 75 ITR 33 (Bom). The account books of an assessee cannot, therefore, be rejected and an assessment made under s. 13 of the IT Act, 1922, merely on the ground that the addresses of the assessee are not mentioned in the case of cash transactions. H.S. Builders vs. ITO (1996) 86 Taxman 214 (Jp)(Mag)......... (sic) Whether history of assessee's case itself was a guide in applying rate of profit and, therefore, CIT(A) was not justified in enhancing rate-Held, yes. P. Venkanna vs. CIT (1969) 72 ITR 328 (Mys). Other things being equal, profits estimated during an earlier period may, in a proper case, guide estimation of profits of a subsequent year. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal was justified in allowing depreciation even if the ITO had categorically held that the income was estimated after allowing admissible depreciation. CIT vs. Bishambhar Dayal & Co. (1994) 210 ITR 118 (All); and CIT vs. Jain Construction Co. & Ors. (supra). 5. On the other hand, the learned Departmental Representative contends that incriminating documents pertaining to 8-10 years were seized. Allegations are proved. Assessee was earning high profits but (sic) was disclosed. The modus operandi was that the assessee was inflating expenses in the form of cash payment, etc. Directors have channelised the money back in the share capital in the promoter's quota. A reference was drawn to an instrument at paper book p. 98 filed by the Department which is a letter contending that the assessee has agreed to the application of rate of 11 per cent. This fact has been borne out in the assessment order in para 8 as under : "That the proposal of the Department to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned CIT(A) as per copies of grounds of appeal filed along with this letter, certain judgments have also been referred as under : (i) Ugar Sugar Works Ltd. vs. CIT (1982) 27 CTR (Bom) 174 : (1983) 141 ITR 326, 335; (ii) CIT vs. Stepwell Industries (P) Ltd. (1997) 142 CTR (SC) 345 : (1997) 228 ITR 171 (SC); (iii) U.K. Paints (India) Ltd. vs. Dy. CIT (1997) 57 TTJ (Del) 537 : (1998) 66 ITD 450 (Del); and (iv) Shri Ambica Mills (P) Ltd. vs. CIT (1992) 106 CTR (Guj) 37 : (1992) 198 ITR 99 (Guj). In his letters furnished after the close of the hearing, the learned Departmental Representative submitted as under : "That the assessment in this case was made on agreed basis keeping in view several documents seized, lengthy investigation carried out and the findings of the special audit got done under s. 142(2A) of the Act. This option of agreed assessment was chosen by the assessee not under pressure but voluntarily with the intention to avoid further investigation. That all the exercise done at the time of assessment proceedings, were brought to the notice of the then CIT, Jaipur, several times and as a result of discussion held with the then CIT, Jaipur, the assessee agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove submissions, it is prayed that application of NP rate at 11 per cent and other additions made may kindly be confirmed and the assessee's appeal deserves to be dismissed. Alternatively : It is prayed that since the assessee has betrayed from its promise and trying to breach the trust, the entire assessment may kindly be set aside to be made de novo to the file of the AO so that more speaking and detailed order can be passed keeping in view of various incriminating and seized documents/material as discussed above. This request is mainly made with a view that assessment in this case was made just like agreed settlement/assessment after taking a very judicious view in the interest of Revenue with the directions of and in consultation with the CIT, Jaipur. If the above mischief of assessee is entertained by the Hon'ble Bench, then it will set a bad precedent. Hence, it is again requested that all additions may kindly be confirmed." Annexure. 'A' appended to letter dt. 2nd Jan., 2001. Rs. Disallowance out of public issue 40 lacs Illegal payments to Railways officials, assessee was confronted. 30 lacs Benami investment in public issue (promoters quot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 29 are deemed to have been taken into account while making such an estimate. The reliance on Punjab & Haryana High Court and also that of the Hon'ble Rajasthan High Court reported at 245 ITR 527 (supra) quoted by the learned authorised representative is on different facts. It was, therefore, urged that the ground raised by the assessee on account of application of net profit rate as well as the deduction of interest needs to be rejected. 7. On the other hand, the learned counsel contends that it is evident from the assessment order at p. 3 that the audit was carried out by the auditors of the assessee on the basis of photostat copies and there is no mistake in making such a qualification in the report by the auditors. The observation of the learned Departmental Representative are not correct in respect of various allegations as referred in the Departmental paper book. In fact the AO himself has not given any finding with respect to certain names found mentioned in the loose papers. The cannot be said to be politicians at this stage. No inference can be drawn against the assessee. Extortious payment as noticed through the special audit report were not confronted to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d money by using multiple applications and Benami investment in the public issue of the company and cash transactions have been made by violating the provisions of s. 40A(3). The AO finding the complexity in the accounts of the assessee and also that the tax auditors have qualified in their report as to the audit of accounts carried out by them from photostat copies of primary books only and there was non-availability of vouchers as they are lying seized with the Department, decided to get a special audit done under s 142(2A) of the IT Act, 1961. 10. A number of discrepancies and defects as reported by the special auditors or as observed by the AO were pointed out to the assessee through various questionnaries and the assessee was required to explain as to why the additions should not be made on the basis of such discrepancies. 11. The assessee vide its letter dt. 7th Aug., 1998, pointed out that the report of the auditors is itself full of deficiencies and that the report is not a correct version of the facts of the case. It was also pointed out that the auditors have exceeded their statutory authority while making observations on the system of accounting and vouching. 12. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order. He was of the view that the correct income of the assessee cannot be deduced from the books of accounts maintained by the assessee and found it a fit case for applying the provisions of s. 145(2) of the IT Act. This has been done by the AO without bringing on record as to what are those remaining transactions which the assessee has not been able to explain to his satisfaction, nor did he prove or quantify the suppression or inflation as alleged by the auditors in their report or observed by the AO himself as also that no basis were given to hold that books have not been maintained in regular course. Still the AO chose to reject the accounts and applied a net profit rate of 11 per cent. It appears that accounts have been rejected because he found the assessee in a fix and not for other reasons. 14. The learned Departmental Representative before us narrated the various suppressions and inflations and also filed the same through Annexure 'A' of his letter dt. 2nd Jan., 2001, and contended that he had confronted the assessee with all such transactions, though the same are not conclusively brought on record before finally applying the net profit rate as the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the activity, but the AO neither informed the appellant that the proposal made is acceptable nor did he act in accordance with the offer so made by the appellant. It appears that of his own volition and unilaterly, the AO had chosen to assess at the rate of 11 per cent by allowing depreciation alone and not the interest which was a condition precedent to the proposal of the appellant and contending it as agreed by the appellant. As a matter of rule, the AO could not have accepted and rejected the same instrument. The existence of a choice between two rights was necessary so as to term it as an agreed assessment. It was thus necessary for him to adopt the contents of the instrument as a whole since a person cannot approbate and reprobate the same transaction. Having not accepted the instrument partly, the condition of agreement stand not applied. Nowhere the material on record also suggests of existence or availability of any acceptance or agreement by the appellant. We also find that the assessee did not communicate to the AO that he is giving up his statutory remedies to challenge the assessment order. The appellant neither acknowledged the liability nor did he make any assert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also well settled that there is no estoppel against a statute. It is thus now a trite law that the principle of estoppel has no application when statutory rights and liabilities are involved. It cannot impede right of appeal. No Court can scuttle or foreclose a statutory remedy of appeal or revision. Accordingly, we are of the clear view that neither the assessment could be said as an agreed assessment nor that the appellant agreed to application of 11 per cent of profit rate nor also the appellant could be stopped from resorting to the remedy of appeal. We, accordingly hold that the appellant had correctly invoked the jurisdiction for seeking relief before us and allow raising of such a plea by him. 15. After having held that this is not an assessment where the assessee has agreed to application of 11 per cent rate, we, therefore, proceed to find out the justification in applying the said rate of 11 per cent by the AO. The learned Departmental Representative before us has contended that the main Annexures are Annexures B and C of the audit report, which have led to the application of the said profit rate. We have perused para 7 of the assessment order and find that the AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee under a separate ground. The claim of the assessee under s. 35D does not appear to have been quantified and allowed on this basis by the AO himself if he considered that whole or part of the said amount pertains to the public issue incurred by the assessee. Having not done so, it stands to reason that the whole amount thereof cannot be made as a basis for including the same in application of the profit rate as made by the AO. 17. Similarly, the learned Departmental Representative has drawn a reference to the illegal payment to railway officials, etc. We find that such payments, he himself has held to be extortious payment. Nowhere the AO has given any finding that the assessee made these payments wilfully or illegally. The extortious payments are nothing but payments made for business compulsions and the same being a business necessity cannot be said to be not deductible. 18. The issue of Benami investment in public issue stands duly replied by the assessee-company at paper book pp. 168, 169 and 170. It was contended that 3 persons, namely, S/Shri B.P. Sharma, N.K. Bhardwaj and H.P. Sharma made declarations before the learned CIT under VDIS 1997 regarding invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s where adequate facilities of each and every material or supplies thereto are not available. Besides this, the AO having neither proved the inflation nor brought on record even a single transaction to show the suppression of profits, it cannot be said that the amounts so withdrawn by the directors and adjusted at the end of the year are inflated payments. In fact, in the accounting parlance and business circles the purpose of making imprest advance is to meet liability of the business on day-to-day basis for the convenient handling and accounting and to avoid day-to-day repeated withdrawals. Before the annual accounts are closed, an account of the imprest advance is taken from the person to whom it is so made. The appellant has resorted to the same practice which is prevalent in the business circles and nothing new has been done by him. The AO might not be aware of such a practice, and his ignorance could have aroused genuine suspicion. But it is settled law that suspicion howsoever strong cannot take the place of proof. No adverse inference thus could have been drawn by the AO. 20. The prior period expenses as pointed out by the AO also have been answered by the assessee at pape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough calculations or provisional figures of the results of the assessee-company Annexure (sic) the transaction out of that are not alleged to be incurred for the purpose of business. Another Annexure S-3, the AO has not brought any material on record as to whether any opportunity was afforded to the appellant and even whether he recorded any statement of such an employee and confronted the assessee with the same from whose house that paper was recovered. Having not done, it was not permissible to use the same against the appellant. 26. From para 3.3. of the order of the learned CIT(A), we also find that reliance has been placed on the statement of Mr. A.K. Solanki about net profit rate of 11.64 per cent. This has been done without bringing on record as to the circumstances under which such a statement has been made by the said person and as to what he meant by the net profit so informed nor the AO enquired into the correctness of veracity of such statement. Nothing has been brought on record as to how the said rate of 11.64 per cent has been stated by the said Shri A.K. Solanki and what were the basis of stating the rate of 11.64 per cent. What was his authority to make such a sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit rate subject to allowability of depreciation and interest thereon in the case of the assessee was justified in order to cover all the discrepancies, errors and allegations found through the transactions recorded in the books or the loose papers so found and seized from the premises of the appellant or its directors and accordingly direct the AO to recalculate the income of the appellant. 28. The AO has allowed the deduction of depreciation from the net profit rate. He denies the interest by relying on the decision of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions Co. vs. CIT (supra). This view of the AO has also been confirmed by the learned CIT(A). But the assessee contends that the later part of the decision has not been properly applied which is favourable to the assessee. Besides this, it was contended that the jurisdictional High Court in the case of CIT vs. Jain Construction Co. (supra) has decided the issue in favour of the assessee. The Jaipur Bench of the Tribunal has also been taking a consistent view and allowing interest to third parties on net profit applied in making the assessment. The learned Departmental Representative, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's ground Nos. 1 to 2.5. 30. Ground Nos. 3 of the assessee is an alternative ground raised by the assessee. Since we have already held that amount of ₹ 38,06,090 on account of interest is an allowable deduction under the head "Income from business", this ground has thus become infructuous and is, therefore, dismissed. 31.Ground Nos. 4, 5, 6 & 7 relate to the addition of ₹ 13,34,308 arising from Annexure AD-28/10 siezed by the AO. 32. Rival submissions has been heard with reference to the case law relied on by both the parties. The AO has made this loose paper as annexure to the assessment order. This was found and seized during the course of the search. The said paper does not bear any of the dates nor does it refer to the working of any income or profitability by the assessee. The AO did not doubt the explanation of the assessee that the said loose paper relate to the sites of the appellant where contract works are being carried out. The AO has himself accepted the gross turnover from the contract receipts to be correct. However, from the receipt of ₹ 44,82,405 the expenses of ₹ 31,48,097 have been (sic-deducted) and the balanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility of imprest amount with the directors as referred hereinabove cannot be ruled out. Even otherwise, any profit rate from the loose paper found and seized during the course of search from the contract receipts stand duly covered in the net profit rate estimated and as such no separate addition on this account was required. The same is, therefore, directed to be deleted. 34. Ground No. 8 raised by the assessee stands already dealt in the main ground of application of rate. No comments are, therefore, necessary. The same is accordingly treated as disposed of. 35. Ground No. 9 relates to the charging of interest under s. 234B. Both the parties have agreed that the issue is squarely covered by the decision of apex Court in the case of CIT vs. Ranchi Club Ltd. & Ors. (2000) 164 CTR (SC) 200 : 24 Tax World 452 (SC). 36. After hearing the rival submissions and respectfully following the decision of Hon'ble Supreme Court of India in the case of CIT & Ors. vs. Ranchi Club Ltd. & Ors. in Civil Appeal No. 10360 of 1998 and 145 to 149 of 1997, we direct the AO to charge interest under s. 234B on the total income as declared in the return by the appellant and not on the income so de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not provided to the nominated chartered accountant and his report has not been considered by the AO while making the assessment, therefore, it is a clear violation of the principle of law and keeping in view the judgment of Hon'ble Allahabad High Court in the case of Swadeshi Cotton Mills Ltd. vs. CIT (1987) 63 CTR (All) 335 : (1988) 171 ITR 634 (All) wherein it was held that : "There should be an honest attempt to understand the accounts of the assessee." Since in the case before us, it appears that the complete and proper material for auditing the books of accounts was not provided to the special audit, therefore, it is a complete disregard of the provisions of the s. 142(2A). However, instead of sending the matter back to file of the AO I am of the view that since both parties have agreed to apply 11 per cent net profit rate, therefore, in view of my discussion in the later part of my order, the assessment completed by applying net profit at 11 per cent is upheld. 3. I further do not agreed with the view of learned AM who has held in line 17 of page No. 19 that "we hold that the assessment cannot be termed as an agreed assessment nor that the rate of 11 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of the assessee, which cannot be said that if the later request is not accepted, then the request made in the first para of the letter automatically goes off. As a matter of fact, I find that the AO has also accepted the assessee's request for allowing depreciation but the interest was not allowed by the AO, following the decision of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions vs. CIT (1999) 151 CTR (AP) 207 : (1998) 232 ITR 776. 8. Since the assessment was made on the clear admission by the assessee vide his letter dt. 9th Sept., 1998, and in view of the (sic) of Mr. A.K. Solanki, in which (sic) higher net profit rate at 11.64 per cent was admitted and in the absence of any contrary material brought on record to show that the confession made by the assessee is not voluntary or under duress, I, therefore, keeping in view of the judgment of Hon'ble Supreme Court of India in the case of Surjeet Singh Chhabra vs. Union of India & Ors. (1996) 135 Taxation 711 hold that the net profit rate applied by the AO is quite justified and hence the order passed by the CIT(A) on this account is upheld. 9. Except, the issue of net profit rate at 11 per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to have caused any illegality so as to prejudice the rights of the appellant or that the AO has merely erred in accepting and rejecting the same instrument of dt. 9th Sept., 1998. 5. Whether, on facts and findings, there was an estoppel in law on the assessee to appeal against the order so made. 6. Whether, there was material on record for learned JM not agreeing to the two findings recorded by the learned AM as referred in his order and also that the AO did not examine voluminous papers, accounts and documents before applying a net profit rate of 11 per cent. 7. Whether, on the facts and in law, the assessee could have invoked the jurisdiction of the Tribunal and claim relief against the assessment so made and rate applied by the AO. 8. Whether, on facts, findings and in law the AM was right in applying a profit rate of 8 per cent or that there was sufficient material and basis to uphold the application of rate of 11 per cent which the Tribunal could not have disturbed and was beyond its competence. V. Dongzathang, President (As A Third Member) : 22nd May, 2002 The Jaipur Bench of the Tribunal made a reference under s. 255(4) of the Act in which the following question w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim relief against the assessment so made and rate applied by the AO. 8. Whether, on facts, findings and in law the AM was right in applying a profit rate of 8 per cent or that there was sufficient material and basis to uphold the application of rate of 11 per cent which the Tribunal could not have disturbed and was beyond its competence." Neither the question proposed by the JM was counter-signed by the AM nor the questions proposed by the AM were counter-signed by the JM. In such a case, if there is no unanimity on the question itself, there can be no majority decision even if all the questions referred by each of the Members are answered by the Third Member. Technically the reference made under s. 255(4) is defective and is liable to be returned to the Bench for making an agreed point or points of difference so that the Third Member can apply his mind. 2. From a cursory reading of the orders, it appears that the assessee in this case made a counter-proposal to the AO to the effect that the proposal to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be termed as an agreed assessment. The assessee never agreed to the application of net profit rate of 11 per cent. The AO proposed to apply a profit rate exceeding 11 per cent as per notice dt. 31st Aug., 1998, placed at APB pp. 48-50. To this the assessee gave a counter-offer as narrated by the AO in his order at internal pp.7-8 as under : "Regarding profit estimation the assessee has replied on p. 1 point 1 of its reply dt. 9th Sept., 1998, that the proposal of the Department to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresses of sub-contractors, etc. and also unable to produce all witnesses. The assessee further stated that the allowability of depreciation and the interest on borrowed funds being an inseparable liability fastened with the conducting of the activity deserves to be allowed." From the above it is evident that the AO himself has acknowledged the counter-offer and did not act according to the counter-offer given by the assessee. Contrary to this, the AO proceeded in applying a net pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning that the books of account maintained are correct and complete and the profit could alone be estimated based upon the books of account maintained by it, if there is no material on record to record a finding that the books of account are either incomplete or incorrect or method of accounting of the assessee is such on the basis of which true profit cannot be deducted. The assessee's alternate submission was merely to avoid any confrontation with the Department and to purchase peace, though without admitting any deliberate errors, the assessee submitted that the proposal to apply profit rate of 11 per cent will be acceptable which was a conditional offer. It is not a case where the assessee can be said to have unequivocally agreed that the income of the assessee be determined on agreed basis as was the case before their Lordships of the Hon'ble Allahabad High Court in the case of Sterling Machine Tools vs. CIT (1980) 122 ITR 926 (All). The assessee's counsel further submits that the Hon'ble Supreme Court in the case of Prem Ex-Serviceman Co-op. Tenant Farming Society Ltd. vs. State of Haryana AIR 1974 SC 1121 at p. 1122 has held that the effect of an alleged admis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer, the same cannot be regarded as an estoppel, which in law cannot be so regarded. The assessee was, therefore, entitled to appeal. It is thus submitted that the assessee has been able to establish that the offer was erroneous and as an alternative and conditional one, and in the light of the decision of Pullangode Rubber Produce Co. Ltd. vs. State of Kerala 1972 CTR (SC) 253 : (1973) 91 ITR 18 (SC), the counter-offer of the assessee cannot be treated as conclusive. It was further submitted that the learned AM in his order, which was dissented by the learned JM has already given a detailed reasoning and the assessee placed strong reliance on such reasons taken for arriving at the conclusion that the assessment so made cannot be termed as an agreed assessment and it was justified to apply a profit rate of 8 per cent subject to allowance of depreciation and interest, though the same are on higher side and are not admitted by the appellant. Reliance has also been placed on the decision of jurisdictional High Court in the case of CIT vs. Jain Construction Co. & Ors. (1999) 156 CTR (Raj) 290 : (2000) 245 ITR 527 (Raj). 3. On the other hand, the learned Departmental Representative ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained by the appellant were duly audited and were supported by report of auditors. The assessee disclosed a net profit rate of 3 per cent. The AO, however, decided to get the special audit done under s. 145(2) of the IT Act, 1961. The discrepancies and defects as pointed out by the special auditors M/s H.M. Singhvi & Co. CAs. in its report, which came after extension upto 22nd June, 1998, were duly replied and reconciled by the appellant through its letter dt. 7th Aug., 1998. It was also pointed out in that letter that the auditors have exceeded their statutory authority while making observations on the system of accounting and vouching. The aforesaid reply of the appellant to the audit report was duly examined by the AO himself and the matter was also discussed by the AO with the special auditors vide para 8 of the order of AO. The AO found that there were certain seized annexures containing loose papers, which were not covered by the special auditors' report. The learned Departmental Representative, present in the original proceedings before the Tribunal, has also agreed that the auditors have committed certain mistakes. From such findings and admission, the assessee's ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further submitted as under : ".......we have already furnished the desired details, informations and explanations and documentary evidences and also state that we have receipts from contract work of Indian Railways only which is credited through banking channel in the books of accounts. No part of receipts are from any source other than contract work from Railway. Excepting the internal movement of funds amongst directors, staff head and site offices for execution of contract work and other business related outgoing, we have no credit and debit of funds in the entire accounting period. Notations and jottings as indicated in the entire seized records which have relation with the assessee-company are absolutely within the expenditure claimed/receipts declared in the financial records and there being a total merger of seized records in the financial accounts no adverse inference may please be drawn. The notations and jottings are covered under 11 per cent NP rate." 5. From the above submissions and the request of the assessee, it is evident that the AO proposed to apply a net profit rate exceeding 11 per cent. This was not accepted by the appellant. The appellants while m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found to have chosen to assess @ 11 per cent by allowing depreciation alone and not the interest which was a condition precedent to the proposal made by the appellant and the AO's application of 11 per cent profit rate contending the same to be as agreed by the appellant, is not a correct view under the facts and circumstances of the case more particularly when the AO could not have accepted and rejected the same instrument at the same time. It was necessary for him either to adopt the contents of the instrument as a whole or not to adopt the same. The offer of the AO was to apply a profit rate exceeding 11 per cent. He did not do that. The material on record also does not suggest an existence or availability of any acceptance or agreement by the appellant. We also find that the assessee did not indicate to the AO that he is giving up his right or statutory remedy to challenge the assessment order. The appellant neither acknowledged the liability nor did he make any assertion that the books of account do not disclose the correct income and it is under such circumstances, the appellant is found to be aggrieved and challenged the action of the AO before the learned CIT(A) which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h admittedly the reply thereto was duly furnished by the assessee. Merely because some of the sub-contractors could not be produced at the relevant time cannot lead to the conclusion of application of exorbitant rate of 11 per cent that too without giving a finding that the expenditure so claimed was not for business necessity or that it did not relate wholly and exclusively for the purpose of business to the carrying on of business as required under s. 37 of the IT Act. In fact, the AO did ask through various queries to give explanation but he has not stated basis of its estimate nor gave chance to the assessee to rebut basis he (sic) at the application of arriving at the precision rate of 11 per cent. The learned Departmental Representative filed annexure A to his letter dt. 2nd Jan., 2001, in supplement to the arguments advanced by him. This annexure contains various queries raised by the AO during the course of assessment proceedings on which our finding are contained hereinafter. 16. The query as regards to expenses on public issue, we find that a sum of ₹ 41.53 lacs stands debited to P&L a/c as per Sch. 12 of the balance sheet as reflected from paper book pp. 216 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors at the year end was used for investment in the promoter's quota of shares is without any basis and not tenable as the dates on which such advances appear to have been made with respect to some of the amounts relate to the period when the public issue which came on 14th June has already come to close on 18th June, 1994. It is not the case of the AO that the amounts so withdrawn have not been debited in the accounts of the company nor that there is no expenditure incurred by the directors for the business purposes of the appellant. In such circumstances the allegation appears to be unfounded and without any basis. 19. The interest-free advances stated to be given to directors stand duly replied by the appellant as per paper book p. 132. The record reveals that such advances are not ₹ 50 lacs but only ₹ 36.7 lacs. The circumstances under which the advances have been made have also been detailed, which inter alia, included the payments as required for meeting out the contingencies of the business since the work of the appellant is spread over to 19 sites. The said payments are duly accounted for and the account thereof has been rendered by the directors before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee, there was no occasion for the AO to come to any different conclusion. 21. The capital expenditure of ₹ 63,259 is nothing but the payments made for expenditure on items of the assets purchased having a cost below ₹ 5,000 and under the provisions of the IT Act, the same are fully deductible. 22. With respect to Annexures A, B and C the AO has made only general observation. The assessee has also furnished reply to pp. 112 to 114 and each and every transaction appears to have been answered in detail. The AO has recorded his own satisfaction with reference to most of the transactions. This gives rise to satisfaction of the circumstances under which such payments have been made. However, the AO himself has not brought on record as to what are such balance payments, if any, about which he was not satisfied. The same also could not be taken as a basis to adopt an exorbitant rate of 11 per cent. 23. The learned Departmental Representative has also made a reference to the payments made to the politicians for ₹ 5,20,000 but such an allegation is without any substance and without bringing any material on record and is therefore, unfounded. 24. Annexure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and from the findings of the AO in the assessment order, it cannot conclusively be said as to what are the remaining payments which could be said not to have been incurred wholly and exclusively for purpose of carrying on of the business as the assessee has been able to substantiate its claim before the AO. We also find that nowhere in the assessment order the AO made it clear as to how he has arrived at the surgical precision rate of 11 per cent. Even if in the absence of any supporting vouchers the AO was justified in invoking provisions of s. 145 of the Act, though not challenged by the appellant before us, it did not mean that he had got abundant power to make the additions or estimation at his sweet will. It is settled proposition of law that assessment is a quasi judicial proceedings in which the personal will or rough estimation did not have any place. The AO is bound to disclose the mental process through which he arrived at a particular figure of income as his orders are being subjected to appeal and, therefore, should have been speaking one. It is evidenced from the past history of the appellant that never a profit rate of more than 7 per cent was applied in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement as the same was not based on any material on record but was only on approximation basis and not relevant to the facts of the case. This statement also did not quantify any correct rate as to whether 10 per cent or 11 per cent or any higher rate. It is, therefore, the statement so given by Shri Solanki is of no credence and the same cannot be used against the assessee for applying a profit rate of 11 per cent which was not supported by any material or basis and was contrary to the facts of the case. Having regard to the entirety of the facts and fully agreeing to the findings as well as observations contained in the order of the learned AM, at para 15 to 27 referred hereinabove we agree that for the same reasons and on the basis of the material on record and the submission made by the parties, the application of profit rate at 8 per cent subject to allowance of depreciation and interest thereon is quite reasonable and the same shall cover all the discrepancies, errors allegations done through the transactions recorded in the books or loose papers found and seized from the premises of the appellant or its directors and accordingly the AO shall recalculate the income of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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