TMI Blog2002 (9) TMI 854X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and also disallowance of dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained 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 acted upon by the Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ora 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. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Discipline. High Court Decisions : The Tribunal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a plea that such a ground was not raised before the learned 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anath vs. CIT (1995) 124 CTR (MP) 28 : (1994) 210 ITR 682 (MP). In view of above 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annexure A-25 page of paper book 16'2 lacs transactions not recorded in books of accounts. Amount advanced to director 50 lacs. Total about 2 crores. Note : Majority of paper has been given in paper book. In case any other paper is needed same will be filed on the directors of Hon'ble ITAT Jaipur Bench, Jaipur. 6. On the issue of the interest, learned Departmental Representative contends that interest is not a charge to net profit and is already covered by the net profit rate of 11 per cent approved by the AO . The learned CIT(A) has also (sic) the decision by observing the judgment of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions (supra), wherein it was held that when the income is estimated under s. 145 of the IT Act, it is in substitution of the (sic) are referred to in 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 applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative deserves to be rejected on this count alone. However, we have also perused the impugned order and find that the learned CIT(A) has adjudicated the issue at para 3 of his order with the headnote as ground Nos. 1 to 3. Application of net rate of 11 per cent and disallowance of interest of ₹ 38,06,090. We find that such a ground does arise from the order of learned CIT(A) and accordingly the plea raised by the Revenue through its letter dt. 3rd Jan., 2001, is hereby rejected. 9. As regards the ground of application of net profit rate, it is observed that an action under s. 132(1) in this case was taken with an allegation that the assessee earned good profit but to suppress profit, the assessee-company has been indulging in inflating its expenses and making extortious payment. It has also channelised the unaccounted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was found not satisfactory for only a few of the transactions. These were not specified by the AO in his order. The AO required the assessee to show cause as to why the results declared by the assessee on the basis of books of account be not rejected and net profit from the contract receipts should not be estimated at a rate exceeding 11 per cent. In his explanation the assessee pointed out that the accounts maintained by the assessee-company are based on the accounting policies consistently adhered to by the company which are duly disclosed in the published annual financial result. 13. The AO observed that the books of account kept by the assessee were not maintained in the regular course of business as the assessee has suppressed its profits on various accounts and as the auditors have pointed out various defects narrated in the 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 ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the AO also and there is no controversy with respect to the conditional proposal. As found out earlier, the offer of the AO was not accepted by the assessee and the appellant elected to make a counter-offer through the instrument dt. 9th Sept., 1998, relevant extract referred herein before, it is evident therefrom that such an offer was made by him for several reasons including inter alia, to purchase peace (though without admitting any deliberate errors) and also because the assessee was unable to collect information like addresses of some of the sub-contractors and produce them for personal examination at the relevant time. The said counter-offer of the assessee was a conditional offer as to the allowability of depreciation and the interest on borrowed funds being an inseparable liability fastened with the conduct 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 SC 1327, 1330 has also held that the existence of choice between two rights is also one of the conditions necessary for the applicability of the doctrine of approbate and reprobate. In Beepathuma vs. Velasari AIR 1965 SC 241, Supreme Court at para 18 have in clear terms expressed that Indian Courts have applied the doctrine in several cases and a reference to all of them is hardly necessary. In 65 MLW 496, the scope of the doctrine of election is stated to be applicable in every species of instrument, whether deed or will. It also applied to both movables and immovables but the doctrine of election, however, cannot be resorted to in order to cause an illegality. A remedy to appeal against the order of assessment has been provided under the IT Act and thus the appellant had a statutory right to appeal. It 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L a/c as per Schedule 12 of the balance sheet as reflected from paper book pp. 216 and 217 filed by the appellant. This amount is stated to be debited as per the accepted account policy of the company. The AO however, has not pointed out as to how much of the said expenditure does not pertain wholly and exclusively for the purpose of carrying of the business by the appellant, more particularly when we find that an amount of ₹ 8,20,091 is also included in the said expenditure pertaining to the postal charges paid by the company and which are prima facie allowable for earning of interest income of ₹ 46.16 lacs by the assessee-company as disclosed under the head Other sources . However, we are not inclined to give our conclusive findings here as the issue of ₹ 8,20,091 is being agitated 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y accounted for and the account thereof has been rendered by the directors before the close of the annual account and expenditure incurred on that account has also been duly recorded in the books of account. The AO has not proved the inflation of expenses and, therefore, there is no material which could lead to application of higher rate of profit on this account. The learned Departmental Representative has also mentioned about inflated payments of ₹ 38 lacs. We have verified this allegation with reference to the reply furnished by the assessee at pp. 127 and 128. As referred in the preceding paragraph, such withdrawals are being made by the directors for meeting out business contingencies and necessities at different sites of the appellant-company as its works are spread over even to very small places 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 account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and without bringing any material on record and is therefore, unfounded. 24. Annexure AA/9 referred to by the AO has not been put-forth before the Tribunal. However, another Annexure AD-9 relates to the similar allegation as dealt in before us in the above paragraph and needs no comments. The AO's Annexure AKK-1 also appears to have duly been answered by the assessee at paper book p. 66. 25. Various other annexures AD/25, AD 2/94, AD 1/3, AD 3/41, AD 4/18 and Annexure S-3 and A1/25 as referred by the learned Departmental Representative find that all such queries stand duly replied by the assessee at paper book pp. 42, 33, 55, 57, 58 and 59, respectively. We also find that the transactions in these annexures relate to certain debits made in the P L a/c or payment allocations at sites proposed to be made or rough 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 emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than 7 per cent was applied in the case of the appellant, more particularly when two of the past assessments have already been completed as a consequence of the search and incriminating documents as alleged in the year under appeal were also available with the AO in those assessments. Keeping in view the peculiar circumstances like nature of business, expenses on public issue, etc. in the year under appeal, the assessee's own history for the earlier years, overall fact findings and circumstances of the case, suppression of profits having not been established, allegations having not been proved, explanation rendered by the appellant and the legislative history, we find that there was no justification in applying or confirming net profit rate of 11 per cent which we hold that the ad hoc application of 8 per cent net 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 recalcula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit rate or not. This Bench is consistently holding that if the total income is computed by applying net profit rate, deductions on account of depreciation, interest paid to third parties and interest and salary payable under s. 40(b) is an allowable deduction. This view has also been upheld by the Hon'ble Rajasthan High Court in the case of Jain Construction Co. (supra), and also CIT vs. Heeralal Bhatt 22 Tax World 817. In view of our findings and for the sake of consistency also of view taken by the Jaipur Bench of Tribunal, we hold that expenditure on interest amounting to ₹ 38,06,090 has been incurred by the appellant for the business purposes and is allowable to him. We accordingly direct the AO to allow the same from the net profit as directed in the earlier paragraph of this order. This disposes of 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prest money for the purpose of incurring expenses at 19 sites spread over at various places cannot be ruled out against which at the time of writing this slip the expenses appear to have been incurred to the extent of ₹ 31,48,097 and further payments of ₹ 4,04,025 and ₹ 1,96,300 have also been made. Out of the balance of ₹ 7,33,983, the imprest that could be said to be available with the three directors of the company is ₹ 7,11,236 as under : Rs. RDS 3,24,050 SDS 2,28,187 NLK 1,58,999 7,11,236 33. The learned Departmental Representative has not been in a position to bring any material on record to show that any of the said amount represented income in the hands of the appellant-company before holding the amount of ₹ 13,34,308 as profit through the said loose paper. The possibility 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal of the assessee is partly allowed. Dinesh K. Agarwal, J.M. : 26th July, 2001 I have carefully gone through the draft order but I have not been able to persuade myself to concur with the views taken in para 27 while applying ad hoc application of 8 per cent net profit rate, subject to allowability of depreciation and interest thereon as against 11 per cent confirmed by the CIT(A) I wish to record my respectful dissent with regard to the said findings on the following grounds : 2. In this case, it was found by the AO that due to the nature and complicity of the accounts and in the interest of Revenue to get the accounts audited by a chartered accountant nominated by the CIT, therefore, the AO. in view of s. 142(2A), referred the case for the special audit. The nominated chartered accountant has given his report on the basis of photostat copy of the primary books of accounts and without examining the various documents and vouchers which were lying with the Department. The books of accounts, vouchers and other material were not provided to the nominated chartered accountant and his report has not been considered by the AO while making the assessment, therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, applied net profit rate at 11 per cent on the contract receipts, therefore, the assessment made by the AO is an agreed assessment, which is a valid assessment in the eye of law in view of following cases of Hon'ble Supreme Court of India : 1. Nathoo Lal vs. Durga Prasad AIR 1954 SC 355, 358; 2. Banarsi Das vs. Kanshi Ram AIR 1963 SC 1165, 1169; 3. Narayan Bhagwantrao Gosavi Balajiwale vs. Gopal Vinayak Gosavi AIR 1960 SC 100, 105; 4. Ramji Dayawala Sons (P) Ltd. vs. Invest Import AIR 1981 SC 2085, 2093; and 5. Thiru John vs. Returning Officer AIR 1977 SC 1724, 1726-7. 7. In the later part of the same letter of the assessee, which has also been mentioned in the order at page No. 18, I find that it is not a conditional part of first para of the letter of offer but, on the other hand, the assessee is requesting to allow depreciation and interest on the borrowed funds being an inseparable liability fastened with the conducting of the activity. In my opinion, it is a separate and independent request 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs, it could be said that the assessee had unconditionally agreed to application of 11 per cent net profit rate and such a rate was not subject to allowance of depreciation and interest. 2. Whether, on the facts and findings and in law, the assessment cannot be termed as an agreed assessment and that the assessee's counter-offer which was conditional to the effect that depreciation and interest on borrowed funds being an inseparable liability fastened with the conducting of the activity was a part of the same instrument dt. 9th Sept., 1998, which was a condition required to be accepted by the AO so as to term it as an agreed assessment before application of any profit rate or that it was merely a request at the discretion of the AO. 3. Whether. the AO has made the assessment on the clear admission by the assessee and that the assessee made a voluntary confession in his letter dt. 9th Sept., 1998, and not that when the AO put him in a fix and the assessee did so only when he was cornered. 4. Whether, the action of the AO could be said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of any profit rate or that it was merely a request at the discretion of the AO. 3. Whether, the AO has made the assessment on the clear admission by the assessee and that the assessee made a voluntary confession in his letter dt. 9th Sept., 1998, and not that when the AO put him in a fix and the assessee did so only when he was cornered. 4. Whether, the action of the AO could be said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the proposal to apply profit rate exceeding 11 per cent is very high and a 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 and produce the personnel for personal examination, etc. The Third Member, therefore, concluded that if the controversy is on this point, then both the parties have to be heard as to whether such proposal put by the assessee is binding on the assessee and then the Bench has to decide on the point. If the said proposal is not binding then a reasonable profit has to be determined on the basis of the material on record and the submissions by the parties. In case there is still difference of opinion on the income determined, then the point of difference has to be crystallised and referred to the Third Member for decision. 2. In the light of the above, the parties were given a specific opportunity vide order-sheet entry dt. 31st July, 2002. The assessee's counsel Shri O.P. Agarwal emphasized that the assessment framed by the AO cannot be termed as an agreed assessment. The assessee never agreed to the application of net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was agreed to be assessed on an income to be determined by application of profit rate of 11 per cent. The assessee's request can in no manner be treated as an admission by him. The assessee has been pleading before the AO that the profit reflected in the P L a/c is based upon book of account which are audited accounts and that the profits reflected are true and correct income of the assessee which deserves to be accepted and the alternate plea made was without prejudice to the acceptance of income as per P L a/c. At no stage the assessee can be said to have given up its right to appeal against such an assessment. The instrument dt. 9th Sept., 1998, itself reveals that the accounts maintained by the assessee are based upon accounting policies consistently adhered to by the company which are published in the public financial results and in this background, the letter dt. 9th Sept., 1998, was addressed to the AO. Thus, in itself the assessee has objected to the application of s. 145(2) of the IT Act, 1961, and even to the application of proviso below s. 145 while maintaining that the books of account maintained are correct and complete and the profit could alone be est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed at a net profit rate of 11 per cent. It, therefore, has to be seen whether the rate of 11 per cent is appropriate or otherwise more in the light of the fact and circumstance that when the assessee was throughout contending that the books of account maintained by it do not suffer from any infirmity and deserve acceptance of the declared book result. Besides explanation of the assessee on various seized material and documents having been furnished to the AO all the receipts of the assessee are from Indian Railways and credited through bank channels in its books of account. No part of these receipts are from any other source, other than the contracts from the Railway. Notings and jottings were found duly explained which were also stated to have been covered by the application of the profit rate in the counter-proposal of the assessee. The AO's thus making a separate addition of ₹ 13,34,308 on account of notings and jottings in its books, goes to show that the offer was conditional and the AO himself has not given effect to the offer. As the AO himself did not accept the offer, the same cannot be regarded as an estoppel, which in law cannot be so regarded. The assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Shri Solanki. The same cannot be said to be applicable to the year under appeal and no credence can be given to such a statement. Under the facts and circumstances of the case when the assessee's accounts were duly audited, it exhibited a true and fair income disclosed by it when the affidavit of the same director filed during assessment proceedings has not been found false or wrong by the AO. 4.1. Rival submissions have been heard with reference to material on record and case laws relied upon by the parties. An action under s. 132(1) of the IT Act, 1961, was taken on the appellant on 14th March, 1999 and books of account 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 specialization in installation of colour light signalling system at the railway stations. The appellant had also undertaken the activity of manufacture and sale of EPABX system at Jaipur and furnished the return of total income declaring an income of ₹ 88,91,700. The accounts maintained by the appellant were duly audited and were supported by report of auditors. The assessee discl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company which are duly disclosed in the published annual financial results. It is, however, submitted at this stage to avoid any confrontation with the Department and to purchase peace (though without admitting any deliberate errors). We submit that your 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 in a position to collect information like addresses of sub-contractors and produce the personnels required for personal examinations, etc. The said offer of the assessee was coupled with the condition contained in the later part of the same instrument at para 15 which reads as under : Interest paid and depreciation provided during the year The allowability of depreciation and the interest on borrowed fund being an inseparable liability fastened with the conducting of the activity deserves to be allowed. Necessary details for allowability of depreciation is attached. Vide para 20 of the same instrument, the assessee has further submitted as under : .......we have already furnished the desired details, informations and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossession. The AO has himself observed 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. It is, therefore, clear that the proposal of the assessee so made was a conditional proposal only and a counter-offer to the proposal made by the AO which came to be made as the appellant at relevant time was not able to collect information about such contracts or produce those personnels which was merely to purchase peace and avoid any confrontation with the Department. However, the AO is found to have chosen to assess @ 11 per cent by allowing depreciation alone and not the interest which was a condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t rate of 8 per cent are contained in his order, paras 15 to 27 which are reproduced as under : 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 annexure are annexures B and C of the audit report, which have lead to the application of the said profit rate. We have perused para 7 of the assessment order and find that the AO has also made a mention that Annexures B and C are the main annexures having major impact on the calculation of the correct profit of the company. We find that the AO himself has analysed each and every transaction with reference to the reply furnished by the assessee and he was of the firm opinion that the assessee could justify few transactions of these annexures. The AO, however, did not bring any material with respect to any of such remaining transactions with which he was not satisfied though admittedly the reply thereto was duly furnished by the assessee. Merely because some of the sub-contractors could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a declaration before the learned CIT under VDIS 1997 regarding investment in the shares of the assessee-company in promoter's quota and the said disclosure had been accepted by the learned CIT as per copy of certificate placed at paper book pp. 139, 144 and 150. Since such disclosure has acquired finality, the same, therefore, cannot be held to be Benami investment as contended by the learned Departmental Representative without proving the same otherwise. The allegation of the AO that money adjusted in the account of the directors at the year end was used for investment in the promoter's quota of shares is without any basis and not tenab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 paper book pp. 123 to 125 and prepaid expenses at pp. 129 and 130 and also at p. 136. The assessee has also contended that it maintains a hybrid system of accounting with respect to such payments which was not opposed by the learned Departmental Representative during the course of hearing before us. The amount on such prior period expenses are only to the extent of ₹ 3.80 lacs. Since the amount so spent are not in deviation to the system of accounting applied by the assessee, there was no occasion for the AO to come to any different conclusion. 21. The capital expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 statement has also not been enquired. All these questions remain unanswered and as the AO himself did not strictly applied the rate so stated by him, no credence can be given to such a statement for applying rate of 11 per cent by the AO in the case of the appellant, more particularly when the same was not produced before the Tribunal also when asked to do so. 27. From the various replies furnished by the assessee and from the findings of the AO in the assessment order, it cannot conclusivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mar Solanki and the relevant question and reply relied upon by him are as under : Q. 38 What is the income of the company from the contract work usually ? Ans. According to my knowledge approximately 10 per cent to 15 per cent to the total receipts. The above statement was taken at the time of search without confronting Shri Solanki with the books of account or any contract work specifically. The question posed to him was not for the specific income of the year under consideration nor for the income from total contract work of the assessee. There was no clarification taken by authorized officer or by the AO as to the fact whether the said Shri Solanki was stating so in respect of any of a single venture forming part of the one and individual business of the appellant comprised of several contract works secured by it, for which the assessee has maintained a combined P L a/c or it was only a hypothetical calculation. The affidavit filed before the AO of the same person was also not found false. The statement so given before the authorized officer was thus not a conclusive statement as the same was not based on any material on record but was only on approximation basis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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