2012-VIL-953-ITAT-PNE
Income Tax Appellate Tribunal PUNE
IT Appeal Nos. 850 to 856 and 1043 to 1049 (PuNe) of 2009
Date: 31.01.2012
ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 2 (1) , PUNE
Vs
INTERMEDIA CABLE COMMUNICATION (P.) LTD.
S. K. Singh for the Appellant.
Dr. V.L. Jain for the Respondent.
BENCH
I.C. Sudhir, D. Karunakara Rao, JJ.
JUDGMENT
D. Karunakara Rao, Accountant Member –
There are fourteen appeals under consideration involving seven assessment years from AY 2000-01 to AY 2006-07. They are the cross appeals consisting of seven each of assessee and revenue respectively. All the fourteen appeals are filed against a composite order of the Ld. CIT (A) dated 24/06/09.
2. The issues raised in the grounds are same and for of the sake of convenience grounds raised by the revenue and assessee for the A.Y.2000-01 are reproduced as under:
"(1) The Ld. CIT (A) has erred in deleting addition of Rs. 3,35,73,600/-.
(2) The Ld. CIT (A) failed to consider the fact that A.O. has carried out investigation recorded statements of operator after which conclusion was drawn and assessment was framed by making addition.
(3) After having come to the conclusion that the assessee's case required estimation of number of subscribers and income because the correct status in this regard was not reflected in its books, the Ld. CIT(A) ought to have upheld the estimate made by the AO.
(4) The Ld. CIT(A) failed to appreciate the fact that the subscriber base was estimate by the AO at 40% of the number of residential accommodation [which, in turn was ascertained from the number of electricity connections] on the basis of the statement of Director of the assessee company that they take 40% of a number of residential accommodation in the area as possible connectivity for planning purposes. The estimate made by the assessee for planning its business can reasonably be expected to be correct as it would be based on the assessee's own experience.
(5) The Ld. CIT(A) failed to appreciate the fact that the estimate made by the AO was all the more reasonable as he had taken the electricity connections of only a part of the area serviced by the assessee.
(6) The Ld. CIT(A) erred in arbitrarily estimating the suppression of subscriber base by the assessee at 10% of the connection shown by the assessee without indicating any basis for the said estimation in his order."
3. Grounds raised by the assessee for the A.Y.2000-01 are reproduced as under:
"1. On the facts and in the circumstances of the case, the learned A.O. has erred in assessing the income of the appellant at Rs. 4,03,26,280/- as against the return income of Rs. 48,01,480/-.
2. The learned Assessing Officer has erred in law in violating the principles of natural justice in utilizing material, behind the back of the appellant, for arriving at a finding of undisclosed income.
(a) The learned Assessing Officer has erred on facts and law in making a addition of Rs. 3,55,24,800/- as undisclosed income based on the surmises and conjectures, speculation and estimates.
(b) The learned Assessing Officer has erred on facts and in law in making addition on the basis of number of cable subscribers/ connections per year on the basis of an estimated percentage of electricity connections."
3. The appellant prays that -
(a) addition of Rs. 3,55,24,800/- made on account of undisclosed income by estimating number of cable connections may please be deleted.
(b) Personal hearing may be granted.
(c) Any other relief Your Honour may deem fit"
4. During the proceeding before us the Learned Counsel for the assessee filed identical additional grounds for all the seven assessment years and the same relevant for the AY 2000-01 read as follows.
"1. The learned CIT(A) erred in confirming the estimation of the suppressed receipts without rejecting books of accounts in compliance with requirements of section 145(3) of I T Act, 61.
2. The learned CIT(A) erred in confirming the estimation of the suppressed receipts in the completed assessment without any evidence in the search material."
5. Admission of Legal Ground and its adjudication: At the very outset of the hearing proceedings before us, Sri V L Jain, Ld Counsel for the assessee analyzed the grounds of both assessee and the revenue for all seven AYs in general and for ay 2000-01 in particular and mentioned that they relates to the addition of Rs. 3,55,24,800/- and other sums for other assessment years on estimation basis in the assessment made u/s 153A of the Act. In the process, the AO rejected the books of accounts of the assessee silently in general and declared number of cable connections recorded in the books. AO failed to enlist or outline the reasons for such rejections and discrepancies in the accounts of the assessee. Relying on the provisions of section 145 of the Act, Ld Counsel argued stating that as per the said provisions, AO is authorized to reject provisions of failure to regularly follow a method of accounting, incorrectness or incompleteness of the accounts. In the absence of any such failure or incorrectness or incompleteness, AO cannot silently reject the books and proceed to resort of best judgment assessment in the manner provided in section 144 of the Act. In the background of the above, the assessee filed letter dated 05/09/2011 raising the aforementioned additional ground and convincingly submitted that the above imported additional grounds are legal in nature and they transfuse into the root of the issues raised in the normal grounds raised by both the parties. Therefore, as per Dr Jain, the said additional grounds ought to be admitted and disposed on its merits. According to him, in case the assessee wins on these additional grounds, the adjudication of the original grounds raised by both the parties in all fourteen appeals becomes an academic exercise.
6. Per contra, Sri S K Singh, Ld DR for the revenue opposed the admission of the additional ground in principle and however, legal nature of these grounds was not contested in view of their obvious nature. Justifying the estimations, Sri Singh argued stating that the assessee, being a cable operator/signal transmitter failed to provide details on the exact cable connectivity. Further, relying on the statement given by the Director, Shri Ejaz Inamdar dated 27/04/2006 ( in response to the question no.13) wherein he mentioned that "we take 40% as possible connectivity", he mentioned that it must constitutes basis for estimations and the books therefore, are not reliable. Further he relied on the written note submitted by the revenue and pointed out the discussion on the allegation of mismatch of number of connections between the Service Tax Division of the Central Excise Department and Income-tax Department. In such circumstances, invoking the provisions of Section 145(3) of the Act are justified as argued by the Learned DR for the revenue.
7. During the rebuttal time, the Ld Counsel for the assessee mentioned that it is a case of search u/s 132 of the Act and it is an admitted fact that no incriminating material was found to suggest the suppression of cable connections for any of the seven years under consideration. Further, Ld Counsel argued stating that there is neither inaccuracy nor incompletion in the accounts maintained by the assessee for all the years under consideration. Under this consideration, decision of silently invoking of provisions of Section 145(3) of the Act and the decision to resort to estimation are invalid. Referring to the department allegation of mismatch of the cable connections between the ones disclosed in income tax return and those alleged by the authorities of Service Tax Division, Ld Counsel demonstrated that the allegations made by the Central Excise Department, Service Tax division, were found untrue. Therefore, no credibility should be attached to such allegation. Further, he mentioned that the books maintained by the assessee are correct, accurate and complete in all respect and they were duly audited by the statutory auditors as per the provisions of Section 44AB of the Income-tax Act. He also mentioned that the AO failed to point out any discrepancies in the said Audit Report.
Adjudication of the Additional Grounds
8. We heard both the parties and perused the orders of the revenue and issues raised in the orders of the revenue and issues raised in the additional grounds. We find that there is no dispute on the legal nature of the issue raised in the additional grounds. Considering the non requirement of any investigation in to the primary fact required for adjudication of the said legal issue raised in the additional grounds, we are of the opinion that the additional grounds raised should be admitted in the interest of the justice.
9. The issue raised in the additional grounds relates to the requirement of rejection of books of accounts as per the provisions of Section 145(3) of the Act before suppressed receipt is resorted by the assessing officer. For adjudicating to the above we proceed to bring out some relevant facts and the background of the assessee.
Background Facts
10. Assessee company carries on the business of cable operator services as well as transmitting signals to its input holders / franchisees. There was search action on the assessee on 14/11/2005. The revenue suspected the bona fide of subscribers base of the assessee and they are of the number of cable connections of the subscribers are suppressed. Otherwise, admittedly no specific inaccuracy or incompletion in the accounts are noticed in the books maintained by the assessee for all these years. Otherwise, the suspicious areas identified by the revenue leading to estimation based best judgment assessment are as under.
11. First reason for rejection of book result: During recording of the strong statement in response to a question no.13 Mr. Ezaz Inamdar, Managing Director of the company revealed their base for planning and the said questions and answers are given in para 6.2 of impugned order which reads as under.
"Question 13 - Information regarding certain housing to ascertain the number of accommodations available /existing in these societies and the data was compared with the number of direct cable connections shown by ICC. It was found that percentage of connectivity was merely 32.45%. It is however brought to your notice that these housing are occupied mostly by the urban middleclass were having a cable connection is routine. In the light of the above, please state why it should not be assumed that the cable connectivity is understated to a large scale ?
Answer - Whatever information provided to your office regarding direct cable connectivity is correct and there has been no discrepancy in regard to direct connections of ICC. So far the percentage of connectivity discussed there are factors of vacancy in residential accommodations, investors from Mumbai and NRI's. Further, for planning purpose, we take 40% as possible connectivity."
Thus, the AO inferred to the conclusion that the assessee's books does not reflect the correct number of cable connections as accounted ones are far below the said 40%. AO also stumbled on some information involving the allegation of service tax evasion in turn suppression of cable connection evading service tax.
12. Otherwise assessee files regular return of income. Ex consequenti to search action, notices u/s.153A were issued on 30/10/2006 for all years under consideration. After examining the contents of the returns, the scrutiny assessment was completed adopting the uniform basis of estimation @ 40% of the electricity connection of the area (Provided by the MSEB as a cable connection of the assessee). Assessing Officer compiled the year-wise rate per cable connection. The assessment for all the seven assessment years were completed and finally determined the undisclosed income of all the seven years as per the chart (on page 24 of assessment order) given below.
|
A.Yrs. |
Indexed Connectivity |
Option (40%) |
Shown by Co. |
Balance Not shown |
Rate per connection |
Undisclosed income (x months) |
|
2000-01 |
95571 |
38228 |
13558 |
24670 |
120.00 |
3,55,24,800 |
|
2001-02 |
42050 |
42050 |
14276 |
27774 |
170.00 220.00 Sub total |
1,41,64,740 5,49,92,520 6,91,57,260 |
|
2002-03 |
115641 |
46256 |
14904 |
31352 |
220.00 |
3,44,87,200 5,92,55,280 9,37,42,480 |
|
2003-04 |
127206 |
50882 |
15364 |
35248 |
270.00 |
4,75,84,800 6,69,71,552 11,45,56,352 |
|
2004-05 |
139926 |
55970 |
16366 |
39604 |
271.43 |
2,14,99,427 |
|
2005-06 |
153604 |
61441 |
21505 |
39936 |
298.15 |
7,14,41,510 14,66,09,049 |
|
2006-07 |
168333 |
67333 |
23175 |
44158 |
355.70 |
3,14,14,001 |
|
Total |
77,18,94,068 |
13. The above table reflects the mode and manner of estimation of income for seven AYs and sum of total income for all seven AYs so estimated works out to Rs. 77.12 crores. After the scrutiny assessments, then the matter travelled to the first appellate authority. During the first appellate proceedings, the assessee questioned the AO's basis of the estimation and principles to be followed by the assessing officer in matters of assessments involving search and seizure actions like present one and mentioned in search assessment, there is no role for estimation such as 40% of MSEB connections. Assessee argued that such weird and unfettered estimations are against the set principles of Search and Seizure assessments.
14. On hearing both the parties as per the discussion given in para 8 of the impugned order the CIT(A) resorted to different estimation, his estimation is given in para 8.1 is as follows:
"8.1 Taking into account the above-mentioned aspects and material on record which, inter-alia, includes the findings of the Assessing Officer regarding lack of proper maintenance of record in respect of subscriber base, I am of the considered view that it would be fair and reasonable if income of the appellant is estimated by increasing 10% of subscriber base with reference to number of connections shown by the appellant for the purpose of income-tax for all the assessment years under appeal. (For this purpose, rate per connection per month shall be adopted from the working adopted by the A.O. in the assessment order). This estimation is held to be reasonable and fair keeping in view the leaking of revenue because of questions about genuineness of input holders as mentioned above and also because of suppression of number of subscribers. This gives following results :
15. Thus, the size of the cable connectivity of the assessee is the bone of contention between the parties. While the AO estimated the same @ 40% of the MSEB connectivity of an area, the CIT(A) restricted the same to 10%. Per month rate per suppressed cable connection is confirmed by the CIT(A) without any discussion in the impugned order.
16. Aggrieved with the above relief granted by the CIT(A) in favorite of the assessee, the Revenue filed appeals and the details are on the first pages of this order. Further, aggrieved by the CIT(A)'s decision in not deleting the additions in full, the assessee filed appeals for all years under consideration.
Facts relevant to additional grounds:
17. Assessee is a company whose books of accounts are duly audited as per the provisions of the Act. With the exception of some unfounded or irresponsible assertions of the AO, who held in para 12 of his order that there exists some evidences to support the suppression of cable connections by the assessee, otherwise, the search action did not result in the discovery of any direct evidence to demonstrate the same so show that the entries or books of accounts of the assessee for seven assessment years are inaccurate and they suffer from deadly problem of incompleteness of the books of accounts. However, on the issue of existence of such evidences, there was discussion by both the parties during the proceeding before us. In response to the challenge of the assessee's counsel for production of such evidences, the revenue could not bring out any such evidence to strengthen their case. Therefore, we find no difficulty in expunging such assertions of the AO as inappropriate and therefore, proceed to uphold the view of Ld Counsel for the assessee. Further, in support of their belief on the allegations of suppression, the Revenue kept heavy reliance on the allegations of suppression of cable connections for Service tax of the Central Excise Department. In this regard, Ld counsel demonstrated successfully to the conclusion that the said department could not finally succeed in clinching the existence of any evasion of service tax by way of suppression of cable connectivity. Therefore the books accounts of the assessee are proper, reliable, complete and from any discrepancy and inaccuracy. The other point on which the Revenue kept it's heavy reliance relates to the answer of Sri Inamdar given in response to question no.13 ie "we take 40% as possible connectivity". As per the asses see, the same was given in the context of business planning. Obviously it was meant for business set up, installation plant and machinery, employees recruitment, purchase of electronic gadgets etc. Its a vogue and generalized assertion of Sri Inamdar and much importance as done by the AO should not be attached. On the other hand, the revenue relied heavily the said statement of Sri Inamdar which is evident from the way AO adopted the said 40% as the basis of estimation of the suppressed cable connections of an area. Of course, the CIT(A) did not approve of the AO'S line of estimation @ 40% and the CIT(A) in turn resorted to estimation @10% of electricity connections of an area. Thus, in principle, the CIT(A) rejected the accounts of the assessee and however, he granted relief on quantity of estimations. As there is no express discussion in the orders of the revenue that the AO pointed out any inaccuracies or incompleteness of the accounts. Similarly, there is no express rejection of the books of accounts any of the years under consideration that the accounts of the assessee are rejected invoking the provisions of section 145 of the Act. Therefore, in the light of the above factual matrix of the case, the assessee raised the impugned additional grounds questioning the decision of the AO in making the assessment in the manner provided in section 144 of the Act without invoking the provisions of section 145 of the Act for rejecting the accounts of the assessee. Ld Counsel filed the following two written submissions and the same is reproduced in the succeeding paragraphs of this order.
18. Extract from the written submission by the Assessee:
"13. Thus, from the above, it is evident provisions of Section 145(3) are invoked under sub-section (3) on account of Incompleteness of books of account & Inaccuracies of the said books of accounts
14. In the light of the above scope we have examined the fact of the present case. The standard of the revenue is estimations by the assessing officer are justified even when the specific inaccuracies or incompleteness are not pointed out .
(2) Assessing officer did not make specific reference of sub-sec.(3) of the Act in his order
(3) and there is allegation by the service department about the number of ----statement of Shri Ezaz Inamdar about i.e. "we take 40% as possible connectivity" on the other hand the standard of the assessee is as provided in the Para 5 to 8 and rejoinder also of written submissions which is as under.
"5. The Assessing Officer has merely concluded (as can be seen from Para 12 of the assessment order for A.Y. 2000-2001) that there are evidences which reveal that the subscriber base has been concealed as no proper number of connectivity is being shown on record by the company. This is a mere general, feeble and vague statement without any roots in the facts emanating from the search.
6. The Assessing Officer has himself discarded the estimation of income on the basis of service tax department calculations. The show cause notice dated 3/12/2007 placed at Page 16 of the Paper Book B has been discarded by the Assessing Officer in favour of the show cause notice dated 28/12/2007 (placed at page 76 of paper book B) which seeks to resort to estimation of income on the basis of number of households having electrical connections. This shows the uncertain and unsure stance of the Assessing Officer.
7. Reliance is placed on the following decisions for the proposition that the action of the Assessing Officer to resort to Sec. 145(3) is incorrect :
i. CIT v. Shrimati Poonam Rani - 326 ITR 223 (Delhi)
In the absence of any material pointing towards falsehood of the books of accounts and no particular defect, or discrepancy being pointed in the books of accounts, the Delhi High Court held that resort could not be made to rejecting the books of accounts by invoking Sec.145(3).
ii Saurashtra Ball Pen (P) Ltd. v. DCIT - 24 SOT 556 (Mumbai)
The Hon. Tribunal has analyzed the provisions of Sec.145(3) and concluded that the Assessing Officer has to be satisfied about the incorrectness as also the incompleteness of the Accounts after taking into consideration various factors and not omitting to consider the material before him while exercising such discretion.
iii. CIT v. Rajnikanth Dave - 281 ITR 6 (All.)
The Court held that the Assessing Officer is not justified in rejecting the books results without any allegation that the method of accounting adopted by the Assessee is such that the income cannot be properly deduced.
iv. Madnani Construction Cortn (P) Ltd. v. CIT 296 ITR 45 (Gau.)
When the Assessing Officer has neither expressed his dissatisfaction about the correctness or completeness of the accounts nor any error is pointed out in Profit and Loss Account and Audited report, the powers of best judgment cannot be invoked.
v. Ashoke Refactors (P) Ltd. v. CIT- 279 ITR 457 (Cal.)
Without formation of opinion that the accounts maintained by the assessee were not correct or complete or that income could not be deduced from the books of accounts, the assessee's books of accounts cannot be rejected and such a rejection is perverse and void.
vi. International Forest Company v. CIT- 101 ITR 721 (J & K)
Accounts cannot be rejected merely on the ground that the summons issued to parties were either returned unserved or no compliance was made where the assessee has maintained proper books of accounts and they were audited u/s.44AB and were produced before the Assessing Officer in which no other defect was found.
vii. DCIT v. Associated Petroleum Corporation - 43 SOT 45 (Ahd)
Without pointing out any defect, the Assessing Officer cannot resort to rejection of books and without rejecting books of accounts, Assessing Officer cannot estimate the profits.
viii. CIT v. Paradise Holidays - 325 ITR 13 (Delhi)
8. Reliance is place on the following decision for the proposition that in the absence of assessment year specific incriminating material, assessment of such year cannot be disturbed by invoking the provision of Sec.153C.
i. Sinhgad Technical Educational Society v. ACIT reported in 56 DTR 241 (Pune) and ii. LMJ International Ltd. v. DCIT reported in 119 TTJ 214 (Kol).
Assessee's counsel filed a rejoinder oriented write up summarizing the arguments and counter arguments and the same is reproduced as follows.
Quick responses to the comments provided by the learned CIT (DR) vide a letter dated 07/09/2011 from the Assessing Officer.
1. "During the course of search, it was noticed that the assessee was not showing its subscriber base properly"
- This comment is without any basis in the search material.
2. Shri Ezaz Inamdar has stated in his sworn statement recorded on 27/04/2006 in response to the question no.13 that "we take 40% as possible connectivity
- This response is picked in isolation with utter disregard to the question and the answer. A reading of the question and answer makes it clear that a part of the sentence is extracted to mislead. The full sentence is "Further for planning purpose, we take 40% as the possible connectivity.
3. Para 10 of the assessment order has been extracted to provide the conclusion of the enquiries.
- None of the statements made in Para A-E leads to the inference that an estimate is required.
4. The notice of the service tax department is heavily relied on for the facts contained therein
- The service tax department itself has in order dated 09/11/2010, chosen to drop the proceedings.
5. The comments confirm in the final Para of Page 3 of the letter that it was post search investigations when surveys were carried out that yielded anomaly in rates offered by different franchisees.
6. In so far as the department appeal is concerned, it needs to be pointed out that in the final Para it is already conceded that the income was correctly estimated by the CIT appeals."
19. Thus, this Bench has to now adjudicate if the AO is justified in resorting to estimations when the AO failed to pinpoint the inaccuracies of the accounts or incompleteness of the accounts of the assessee. And when he failed to successfully and expressly invoke the provisions of section 145 of the Act. Further, we need to examine the reliance kept by the AO are proper or otherwise. For analysing the same, we need to first examine the 'scope of section 145 of the Act'.
20. Scope of the provisions of section 145A of the Act- Valid Invoking provisions:
Scope of section 145: The AO assumes jurisdiction in rejecting the books of accounts of the assessee by virtue of section 145 of the Income-tax Act relating to "Method of accounting'. Section 145 was amended by the Finance Act, 1995 with effect from 1.4.1997 and relevant subsection (3) as applicable to the years under consideration reads as under:-
"Method of Accounting
145 (1) …
(2)....
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or ................ , the Assessing Officer may make an assessment in the manner provided in section 144."
21. Sub-section (2) of the pre-amended provision is same as the sub section (3) of the substituted section 145 of the Income tax Act and it has following ingredients: (a) AO being not satisfied about the correctness or completeness of the accounts of the assessee; and (b) consequential best judgment assessment in the manner provided in section 144 of the Act. The expressions at (a) i.e. "AO not satisfied", correctness, completeness of the accounts of the assessee are relevant and they require more elucidation. Before analyzing the phrases of AO being net satisfied' and the 'correctness and completeness of the accounts', it is necessary to elaborate on what constitutes the "accounts of the assessee' used in conjunction with the 'correctness or completeness'. The same has not been defined in the Act in that form.
However, the Finance Act, 2001 introduced clause 12(A) of section 2 providing for an inclusive definition for "books or books of accounts". The clause 12(1) reads as follows:-
"(12A) "Books or books of accounts includes" ledgers, day-books, cash books, account-books and other books, whether kept in written form or as print-outs of the data stored in a floppy, disc, tape or any other form of electromagnetic data storage device."
22. The above definition given in clause (12A) of section 2 is reasonably important for understanding the phrase 'accounts of the assessee' mentioned in the pre-amended section 145(2) of the Act. These expressions were also referred to in the provisions of section 44 AB of the Act. The combined reading of the above said provisions read with section 44AB and other guidelines issued in connection with the books of accounts to be maintained by the class of assessee's of this kind, adequately advocates for maintenance of the said registers/day-books apart from other books/ledgers enlisted in clause (12A) of section 2. In other words, the requirement of maintaining day-to-day registers and day-to-day stock registers is thus a statutory requirement of the assessee-company. There is no adverse comment by the Statutory auditors as evident from the Audit Report enclosed to the Return of income filed by the assessee.
23. Completeness of accounts: The completeness of accounts refers not only to the accounting entries for all the transaction done In the previous year; but also to the list of ledger/books of accounts as described in clause (12A) above and logically it also refers to the support registers, documents, bills, invoices etc. In other words, the failure to maintain relevant registers or any other books described in the list makes the accounts of the assessee incomplete.
24. Correctness of the accounts: The correctness of the accounts refers to the quality or accuracy or reliability or credibility of the accounts maintained by the assessee and it covers the reconcilable mistakes or errors in accounts.
Thus, the completeness refers to list of books of accounts and entries therein and the correctness of the accounts refers to the quality of the accounts of the assessee. AO may reject the books either for reasons of incompleteness of the accounts or for reasons of the correctness of the accounts. AO's satisfaction about the completeness or completeness of the accounts of the assessee assumes importance.
25. Further, with regard to rejection of books of accounts by the AO u/s 145 of the Act, 'accepting the books of accounts of the assessee is a rule and rejecting the same is an exception'. This is the principle in existence and AO shall not reject the books unless the accounts of the assessee suffer from either of the twin reasons specified in the Act ie correctness or completeness.
Hon' ble jurisdictional High Court, in the case of Bastiram Narayandas Maheshri v. CIT [1994] 210 ITR 438/74 Taxman 454 (Bom.) , held that the failure to maintain proper registers contributes to the dissatisfaction of the AO about the fairness or correctness of the accounts and thus the AO is empowered to make the best judgment assessment. It is the settled law that the books cannot be rejected u/s 145 of the act and resort to best judgment assessment, unless the AO record any finding that the books of accounts maintained by the assessee are incorrect rendering it impossible to deduce the profits. AO needs to indicate that he noticed any inconsistency or infirmity in the Audit report. Judgment of Hon'ble High Court in the case of Madnani Construction corporation (P.) Ltd v. CIT [2008] 296 ITR 45 (Gauhati) is relevant. Allegation of lower GP is no ground for rejection of books u/s 145 of the Act as held by the High Court of Punjab & Haryana in the case of CIT v. Patiala District Co-op. Milk Producers' Union Ltd [2010] 328 ITR 615. It is the judgment of the jurisdictional High court in the case of Bastiram Narayandas Maheshri (supra) for rejection of the accounts, non maintenance of the day to day records showing the manufacturing details is adequate. Thus, when no discrepancy is noticed in the accounts maintained by the assessee, AO cannot assume jurisdiction u/s 145(3) of the Act as held by the Delhi High Court in the case of Anand Kumar Deepak Kumar. It is also relevant to mention that without enlisting the defects, incompletion and inaccuracies in the accounts of the assessee, AO cannot expressively or otherwise, invoke the provisions of section 145(3) of the Act. Ahmedabad Bench of the Tribunal held in the case of Dy. CIT v. Paras Dyeing & Printing Mills (P.) Ltd [2010] 4 ITR(Trib) 29 [2011] 44 SOT 12 (Ahd.) that when no specific discrepancies or defects in the books of account of the assessee has been pointed out nor was any material brought to establish that purchases were inflated or receipts suppressed, there is no justification in invoking the provisions of section 145 of the Act. If there was no challenge to the transactions represented in the books, then it is not open to the Department to contend that what was shown by the entries is not the real state of affairs. There was no basis for rejection of books of account. CIT v. Vikram Plastics [1999] 239 ITR 161 (Guj.) was relied on. Thus, suspicion, however strong it may be, is no ground for the AO for invoking the provisions of section 145(3) of the Act. Thus, this the scope of the provisions of section 145(3), which provide authority to the AO to adopt best judgment in the manner provided u/s 144 of the Act.
26. Regarding the 'AO being not satisfied' about the correctness and completeness of the assessee's accounts, the Calcutta High Court judgment in the case of Ashoke Refractories (P.). Ltd. v. CIT [2005] 279 ITR 457/158 Taxman 635 is relevant. In the said case, the Hon' ble High Court held that in order to reject the accounts, the AO has to come to an opinion that the income cannot be properly deduced from the accounts so maintained. In order to arrive at such conclusion, it must be shown that the AO has taken into consideration relevant factors and not omitted to consider the material before him. Thus, the above scope of the provisions of section 145 conclusively establishing the fact that, what is important for rejection of books is the AO being not satisfied about the correctness or completeness of the accounts and it is for the AO to establish the incompleteness or incorrectness of the accounts of the assessee.
Divergent Stands of the Parties of the Dispute - Summation:
27. In the light of the above scope and philosophy relating to the provisions of section 145(3) of the Act, we need to examine the divergent stands of the parties in the litigation.
A. Stand of the Revenue: We have examined the orders of the revenue, perused the material available before us and heard the arguments of the revenue. From all these sources, we find the case of the revenue is that the assessee is covered by the provisions of section 132 of the Act and gathered evidences to suggest the suppression of the cable connections. Further, as per the revenue, the existence of allegations of the evasion of Service Tax by way of discrepancy on the number of the cable connections by the Central Excise Department, Service Tax Division suggest the suppression of the cable connections. Further, the statement of Sri Ijaj Inamdar, who stated that the assessee considers 40% of the electricity connections of the area for planning of his business, also suggests the suppression of the cable connections.
B. Stand of the Assessee: Per contra, the case of the assessee is that the search action never yield any incriminating information, whatsoever, questing the books of accounts of the assessee for all the years under consideration. Therefore, the accounts of the assessee are complete and accurate. Further, as per the assessee, there are no evidences what so ever to indicate that the accounts are incomplete. Ld AR for the assessee challenged the production of the alleged evidences referred to in para 12 of the Assessment order before the Tribunal for which the revenue has no reaction. Thus, the said remarks of the AO on the existence of evidences in support of the suppression of the cable connections are unfounded. Regarding the allegation of service tax evasion by the Central Excise Department, Service Tax Division, Ld Counsel for the assessee explained the said allegation and informed that the said allegation were finally dropped by the said Department as they could not support the allegation. Assessee filed relevant papers to demonstrate the same. Further, Ld Counsel for the assessee relied on various judicial pronouncements to support that the AO never could enlist or provide single conclusive instance of either incompleteness or inaccuracy in the accounts for the all seven AYs under consideration. Assessee maintained all the requisite books of accounts necessary for his business. In such circumstances, the AO cannot resort of estimations adopting weird basis of 40% of the electricity connections of an area in making the best judgment assessments u/s 144 of the Act without validly rejecting the accounts of the assessee. It is also an argument of Ld Counsel that the '40% basis' adopted by the AO was rejected by the CIT(A) in the first appellate proceedings and therefore, the revenue has no valid basis whatsoever for resorting the estimations. Hence as per the Counsel, the impugned assessments should be quashed in view of invalid invoking of the provisions of section 145(3) and consequential best judgment assessment.
28. In the preceding paragraphs of this order, we have analysed the issues concerning the admission of the additional ground tracing the background facts of the case, the scope of the provisions of section 145(3) of the Act, divergent stands of the parties in dispute and the circumstances leading to making of an assessment on estimation basis etc. While discussing the same, we have demonstrated the need for enlisting the accuracies and incompleteness of the accounts of the assessee. In other words, we have approved the existing dictum that 'acceptance of the books of account of the assessee is the rule' and the 'rejection of books is an exception'. In this case, the assessee is under statutory obligation to maintain the books specified in sec. 2(12A) of the Income Tax Act. It is a case where books or accounts are duly audited by the statutory auditors as required under the statute. They are under obligation to provide categorical findings about the verification of the books of account, constant following of the method of accounting adopted, accuracies or completeness if any of the books of accounts. In a case where books are maintained and the same were audited it is the rule that the AO shall accept the said books so long as he has not found out any defects or incompleteness of transactions or discrepancies or any inaccuracies, whatever may be the name given to them. Further, it has been the rule that when the books are rejected by the AO by invoking the provisions of sub-section 3 of sec. 145 of the Act, the onus is on the AO to pin-point or enlist the deficiencies or inaccuracies in the said books of account of the assessee.
Without pointing out the same either directly expressing in the order or indirectly by implication, the AO cannot resort to rejection of the accounts of the assessee and further, he cannot resort to the best judgment assessment in the manner prescribed in sec. 145(3) of the Act. In the light of the above rule in force, we have analysed the scenario of the instant case and find that the AO nowhere expressly rejected the books. In alternative, AO has not enlisted the inaccuracies or incompleteness of the accounts by implication too. Therefore, it is the case of non rejection of books of accounts by the AO by express reasons before AO resorts to the estimation in the manner provided in section 144 of the Act. Further, we find that the search action has not yielded in the discover of any evidences either direct or indirect to demonstrate that the assessee is resorting to suppression of the cable connectivity. Although, the AO carelessly made some references to the existence of evidence (refer to contents in para 12 of the assessment order) , the fact is that no such evidences were brought to the notice of this Bench despite the repeated chances given to the revenue during the pendency of the proceedings before us.
Therefore, we presume that the revenue has no such evidences in their possession as claimed by AO.
29. The other arguments of the revenue include on (i) the statement of Mr. Ezaz Inamdar, wherein it is stated that 40% of the electricity connections of an area is considered for their planning purposes and (ii) the allegations of the service tax division of the Central Excise Department, Government of India who initiated certain proceedings under their laws in support of their allegation of suppression of the service tax by way of suppression of the cable connectivity.
30. Regarding the above argument at (i) above relating to the contents of the statement of Shri Inamdar, it is evident that the said statement is unspecific, vogue and the same was made in connection with planning of the business ie in other words assessee purchases the required machinery with a capacity for gathering 40% of the electricity connections of an area. It should never mean that the assessee is providing cable connections to 40% of the electricity connections. In our opinion it constitutes a wild surmises, which should be rejected outright as done by the first appellate authority in the impugned order.
Therefore, this statement of Shri Inamdar ought not to become a basis for rejection of books of account as the said statement failed to contribute to either incompleteness or inaccuracy of the accounts of the assessee for the seven Assessment Years under consideration. The full sentence of the statement of Sri Inamdar reads that "Further for planning purpose, we take 40% as the possible connectivity" and we failed to understand how the AO can construe the same as conclusive evidence in support of the suppression of the cable connectivity of the assessee in the absence of any other corroborative evidences. In our opinion, the scrutiny assessments of this kind and magnitude involving creation of huge demand are not legally sustainable and therefore, are avoidable. AO should have the wisdom of distinguishing the elements of planning of the company vis avis the earning of actual or real income of the company. The Planning of the company involves the capacity building of the company and it is the endeavor of the company to achieve its full capacity and quite often, it is never reached and plan/capacity of the company is continuously revised upwards. Capacity of the company is not the basis for taxation and therefore, the tax has to be levied on the income and not on the income earning capacity of the assessee. Generally, the capacity of the company is always higher and it is the object related decision of the company. We are surprised how the officers miss these basis issues. Therefore, the AO/CIT(A) have erred in keeping reliance on such generalized statement for rejection of the books of accounts and the same does not constitute reasonable cause for rejection of the Audited Books of accounts of the assessee for all the years.
31. Regarding the argument at (ii) above, learned counsel for the assessee has specifically demonstrated that the said proceedings under service tax laws finally came to the conclusion without any success to the the said Service Tax Division of the Central Excise Department. Therefore, the allegation of the Service Tax Department is merely an allegation without substance under the facts of the case. Neither the Service Tax Department nor the Income-tax Department could pin pointedly demonstrated the existence of suppression of the cable connectivity, which is the business of the assessee. We have already described in the preceding paragraphs that assessee is engaged in providing cable connections and earned income out of that. It is the allegation of the department that the assessee has earned unaccounted income by way of suppression of cable connectivity. But, this allegation of the Central Excise Department, in our opinion, does not merit any attention as the proceedings under the said law never fructified legally against the assessee. In any case, these are mere allegations which should be discouraged outright in matters of making of the assessments in general and search assessments in particular.
32. It is a settled law, the suspicion, however strong it may be, never replaces the specific findings or evidences as they unambiguously throw light on the incompleteness and inaccuracy of the accounts of the assessee. It is not the case in here. Therefore, there is no scope for any such surmises and suspicion in matters of rejection of books of accounts. It is the onus on the AO to enlist the defects or discrepancies or entries or failure of the assessee in maintaining some requisite books in the order before the books are rejected u/s 145(3) of the Act. AO might not have mentioned expressively the provisions of sec. 145(3) of the Act in the order but the requirement is, AO must enlist the defects or discrepancies or incompletion or inaccuracies of the accounts of the assessee. In the instant case AO did not bother to honour the law in its true spirit. How AO can resort to estimation of income without rejection of accounts systematically maintained by the assessee for all the years under consideration and also without invoking the provisions of section 145 of the Act after duly complying with the conditions specified in them? Should we encourage such callous approach of the AO, who did not bother to read the said provisions and conditions specified therein?. AO's order does not contain a whisper about the provisions of section 145 of the Act, while he proceeded to make best judgment assessment. This is not done. Therefore, in our considered opinion the AO made a best judgment assessments in this case assuming jurisdiction u/s 145(3) of the Act invalidly. Such assessments are unsustainable. Therefore, CIT(A) did not approve the AO's decision rightly and he was silent on the issues relating to the provisions of section 145 of the Act and rejected the AO's basis ie 40% of the electricity connections of an area. He fixed the estimation at 10% of the same. We cannot approve the estimations of any kind ie 40% or 10% as the case may be, when the books of accounts off the assessee are not proved faulty on fronts of accuracy or incompleteness. It is a trite law that the onus is heavily on the AO when the books are to be rejected and the income of the assessee is estimated. Unless, the accounts are rejected for express reasons, which is not there in this case, and corroborated by the conclusive evidence, in consequinti, any decision on the estimation of income is unsustainable in law. Therefore, the rejection of books of account implied made by the AO confirmed by the CIT (A) is not proper and therefore cancelled. In consequinti, the estimation of income made by the AO for all seven AYs adopting 40% of the electricity connections of the area as the basis has to be dismissed. Accordingly, the additional ground raised on the invalid jurisdiction of sec. 145(3) of the Act for all the seven years is allowed.
33. In all these seven Assessment Years, both the assessee and the revenue raised the grounds calling the merits of the decision of first appellate authority. All these grounds revolve around the merits of the additions to the return of income. These additions obviously flow from the estimations which have been rejected by us in the preceding paragraphs consequent to our finding on the additional ground adjudication of all these grounds of both the revenue and assessee's appeal for all the seven Assessment Years becomes merely an academic exercise. Therefore, we are of the opinion the grounds are dismissed as academic.
34. In the result, all appeals of the revenue are dismissed and all the seven appeals of the assessee are allowed.
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