By K. B. BHUJLE
Advocate
4. Rameshchandra Rangildas
Mehta vs. ITO
[2020] 421 ITR 109 (Guj.)
Date of order: 15th July,
2019
A.Y.: 2011-12
Income – Accounting – Section 145
of ITA, 1961 – Rejection of accounts and estimate of income – Discretion of
A.O. must be exercised in a judicious manner
For the A. Y. 2011-12 the
appellant had filed his return of income on 15th September, 2011
declaring total income at Rs. 5,34,342. The case was selected for scrutiny and notice
u/s 143(2) of the Income-tax Act, 1961 was issued dated 31st July,
2012. The appellant filed his revised return of income on 30th
March, 2012, declaring a total income of Rs. 7,44,070 and claimed refund of Rs.
23,26,700. According to the appellant, he derived income from civil contracts
(labour job works). The appellant showed gross business receipts of Rs.
12,00,02,100 and a net profit of Rs. 5,37,942. The refund of Rs. 23,26,700 out
of the prepaid taxes contained tax deducted by M/s PACL Limited against the
payment for labour. The appellant showed labour receipts for income account of
Rs. 12,00,02,100.
The A.O., relying on the
statement of the appellant recorded u/s 131 of the Act and the information
received subsequent to the search in the case of M/s PACL India Limited, came
to the conclusion that the dealings of the appellant with M/s PACL India
Limited were accommodation entries. The A.O. issued show cause notice dated 14th
March, 2014 calling upon the appellant to show cause as to why the labour
receipt income of Rs. 12,00,02,100 should not be treated as income from other
sources u/s 56 of the Act. The appellant, vide his reply dated 21st
March, 2014, explained that he had only received commission of Rs. 0.30 on Rs.
100, i.e., Rs. 3,60,000 on Rs. 12,00,02,100 which had already been included in
the net profit and reflected in the profit and loss account. The A.O. rejected
the books of accounts u/s 145(3) of the Act and estimated the income at 10% of
the gross receipts; he made an addition of Rs. 1,20,00,210 as income from other
sources u/s 56 of the Act.
The appellant submitted before
the Commissioner of Income-tax (Appeals) that the estimation of net profit at
10% was on the higher side and he had received commission at 0.45% only. He
also pointed out that the returned income included the profit of Rs. 4,13,742
from the labour contract receipts and set-off should have been granted against
the addition of commission income by the A.O. The Commissioner (Appeals)
estimated the commission at Rs. 24,00,042, i.e., 2% on the basis that the same
is 6.7% of the tax benefit derived by PACL India Limited, i.e., 30%, and the
same was a reasonable estimate. The Commissioner (Appeals) took the view that
the set-off of only the net income from the fictitious contract receipts could
be granted. Further, he reduced the interest income and retail sales from the
net profit to grant the set-off. The set-off granted by the Commissioner
(Appeals) came to only Rs. 1,46,942 [Rs. 5,37,942 (net profit) – Rs. 1,20,000
(interest income) – Rs. 2,71,000 (retail sales)]. Thus, the Commissioner
(Appeals) partly confirmed the addition to the extent of Rs. 22,53,100.
Being dissatisfied with the order
passed by the Commissioner (Appeals), the Department preferred an appeal before
the Income-tax Appellate Tribunal. The appellant preferred cross-objection. The
Appellate Tribunal confirmed the order of the Commissioner (Appeals).
Dissatisfied with the order
passed by the Appellate Tribunal, the appellant filed an appeal before the High
Court and proposed the following substantial question of law:
‘Whether in the facts and
circumstances of the case, the Income-tax Appellate Tribunal was right in law
in confirming addition of Rs. 22,53,100 on account of alleged commission income
at 2% without there being any evidence or material on record for making such
estimate?’
The Gujarat High Court allowed
the appeal and held as under:
‘i) Section 145 of the Income-tax Act, 1961 gives power to the A.O.
to reject the assessee’s accounts. Although sub-section (3) of section 145
gives him the discretion to make an assessment in the manner provided in
section 144, yet this discretion cannot be exercised arbitrarily. The question
to determine in every such case is whether there is any material for the basis
adopted by the A.O. or the Tribunal, as the case may be, for computing the
income of the assessee. The material which is irrelevant or which amounts to
mere guesswork or conjecture is no material.
ii) The A.O. thought it fit to estimate 10% commission for providing
accommodation entries to the tune of Rs. 12,00,02,100. The Commissioner
(Appeals) took the view that the estimation of commission at 10% by the A.O. is
one-third of the benefit, which could be termed as excessive and not a
reasonable estimate. The Commissioner (Appeals), without there being anything on
record, thought it fit to take the view that the estimate by the assessee at 3%
translated to 1% of the benefit derived, which could be termed too low, and in
such circumstances, estimated it at 2%, which would translate to about 6.7% of
the benefit alleged to have been derived by P. This was nothing but pure
guesswork without there being any material or basis for arriving at the same.
The Tribunal was not right in law in confirming the addition.
iii) Ordinarily, we would not have entertained the appeal of the
present nature having regard to the fact that the income has been assessed
based on estimation. However, the way the authorities have proceeded with the
guesswork, it cannot be approved.
iv) In view of the above, this tax appeal
succeeds and is hereby allowed. The question of law is answered in favour of
the assessee and against the Revenue. The impugned order passed by the
Income-tax Appellate Tribunal is hereby quashed and set aside.’
