Praveen Godbole, Advocate for the Assessee. A.K. Singh, Sr.DR for the Revenue.

This appeal by the assessee is directed against the order dated 31-08-2017 of the Commissioner of Income Tax(Appeals)-Allahabad for the AY.2008-09. In this appeal, the assessee has raised the following Grounds:

“1. That in any view of the matter order passed under section 143(3) (of Income Tax Act, 1961) dated 28.12.2010 is bad both on the fats and in law and by such order income as determine at Rs. 9,92,880.00 is highly unjustified in the facts and circumstances of the case.

2. That in any view of the matter the learned CIT (appeal) was wrong in passing ex-party order without providing reasonable opportunity to the assessee hence the order is not speaking order in the eyes of law.

3. That in any view of the matter the assessment is illegal and without jurisdiction in so far as within 12 months there was no service of notice under section 143(2) (of Income Tax Act, 1961) which is mandatory requirement of the Act, hence the assessment is liable to be annulled.

4. That in any view of the matter the gross receipt as declared by the appellant is true and correct which was estimated by the Assessing Officer at Rs. 1,24,06,975.00 is highly unjustified in the facts and circumstances of the case. The allegation of the Assessing Officer about non-disclosure of correct receipt from M/s. Nagarjun Construction Co. is not correct.

5. That in any view of the matter extra addition of Rs. 5,29,882.00 is highly unjustified in the facts and circumstances of the Assessing Officer is without any material and basis on record.

6. That in any view of the matter findings and observations of the Assessing Officer in the order regarding alleged suppression and about profit are incorrect and contrary to the actual facts of the case.

7. That in any view of the matter addition of Rs. 4,26,830.00 by saying unexplained capital from introduced by the two partners is highly unjustified in the facts and circumstances of the case.

8. That in any view of the matter the partners deposited the capital from definite sources, hence the addition is unwarranted in the facts and circumstances of the case.

9. That in any view of the matter charge of penal interest under section 234-B (of Income Tax Act, 1961) and 234-D (of Income Tax Act, 1961) is highly unjustified.

10. That in any view of the matter the appellant reserves his right to take any fresh ground before hearing of the appeal”.

2. Ground No.1 is general in nature and does not require any specific adjudication.

3. Ground No.2 is regarding ex-parte order passed by the CIT(A), which will be considered along with the other grounds by the assessee on the merits of the addition/disallowance.

4. Ground No.3 is regarding the validity of assessment order passed by the Assessing Officer for want of a valid notice u/s.143(2) (of Income Tax Act, 1961) [Act]. At the time of hearing the Ld.AR of the assessee has not pointed out how the notice issued by the Assessing Officer u/s.143(2) (of Income Tax Act, 1961) on 25-08- 2009 is invalid. Further, the assessee has participated in the assessment proceedings in pursuant to the notice u/s.143(2) (of Income Tax Act, 1961) as well as notice u/s.142(1) (of Income Tax Act, 1961). Therefore, when this objection was not raised by the assessee before the authorities below and not disputed the service of notice issued u/s.143(2) (of Income Tax Act, 1961), then in view of the provisions of Section 292BB (of Income Tax Act, 1961), the assessee cannot be allowed to dispute the service of notice issued u/s.143(2) (of Income Tax Act, 1961). It is a matter of fact that the Assessing Officer issued notice u/s.143(2) (of Income Tax Act, 1961) on 25-08-2009, which is within the limitation period as prescribed under such section, accordingly, the Ground No.3 of the assessee’s appeal is dismissed.

5. Ground Nos.4 & 6 are regarding trading addition being the Net Profit @10% adopted by the Assessing Officer as against the Net Profit declared by the assessee as 5.7%.

5.1. The assessee is a partnership firm and engaged in the business of transport contractor. The assessee filed its return of income on 29-09-2008, declaring total income of Rs.26,01,160/-.

5.2. During the course of scrutiny assessment, the Assessing Officer noted various discrepancies and defects in the books of accounts and accordingly, the book result of the assessee were rejected by invoking the provisions of Section 145(3) (of Income Tax Act, 1961). The Assessing Officer therefore estimated the income of the assessee by applying the Net Profit rate before depreciation @10% on the total payments, which was re-worked out by the Assessing Officer at Rs.1,24,06,975/-, after making the addition of Rs.15,58,492/-, as un-accounted receipts. Consequently, the Assessing Officer has made a trading addition of Rs.5,29,882/-. The assessee challenged the action of the Assessing Officer before the CIT(A). However, nobody has attended the proceedings/hearing before the CIT(A) and consequently the appeal of the assessee was dismissed by the CIT(A) by passing the impugned ex-parte order.

5.3. Before the Tribunal, the Ld.AR of the assessee has submitted that the Assessing Officer has made an addition of Rs.15,58,492/- to be the gross receipts of the assessee, without considering the fact that the said amount is part and parcel of the total receipts of Rs.59,70,453/- received from M/s.Nagarjun Construction Co., against which TDS of Rs.67,653/-, was deducted and had been shown in the return of income.

Ld.AR has further submitted that the assessee has explained this fact during the assessment proceedings, however, the Assessing Officer has ignored the facts pointed out by the assessee. Thus, the Ld.AR has submitted that the said addition of Rs.15,58,492/- in the gross receipts of the assessee and computing the Net Profit of such inflated receipt is unjustified. As regards the Net Profit rate applied by the Assessing Officer @10%, the Ld.AR of the assessee submitted that the Assessing Officer has applied an arbitrary and excessive Net Profit rate, without considering any comparable or prevailing rate in the line of business. He has referred to the comparative Net Profit declared by the assessee for the AYs.2007-08 & 2009-10 and submitted that for the AY.2007- 08, the assessee has declared net profit @5.8% which was accepted by the Assessing Officer. Similarly for the AY.2009- 10, the assessee declared net profit @3% which was also accepted by the Assessing Officer. Therefore, the Net Profit declared by the assessee for the year under consideration was @5.70% is according to the line of the past history as well as future results of the assessee. Thus, the Ld.AR has submitted that the addition made by the Assessing Officer by applying the Net Profit @10% is truly arbitrary and unjustified and the same may be deleted.

5.4. On the other hand, the Ld.DR has submitted that the Assessing Officer has conducted an enquiry by issuing a notice u/s.133(6) (of Income Tax Act, 1961) to M/s.Nagarjun Construction Co., and in response to the said notice, M/s.Nagarjun Construction Co., issued second certificate for the payment of Rs.15,58,492/-. Thus, the Assessing Officer has made the addition to the gross receipts of the assessee, on the basis of the information and certificate issued by M/s.Nagarjun Construction Co. He has further submitted that the CIT(A) has given as many as opportunities to the assessee, but nobody has attended the proceedings before the CIT(A) and accordingly, the CIT(A) was having no option but to pass an ex-parte order. He has further contended that having considered the fact that the assessee has not accounted the product receipts in the books of accounts as well as other discrepancies, the books of accounts of the assessee were rejected by the Assessing Officer. Once the books of accounts of the assessee were rejected, the income of the assessee was required to be estimated on some reasonable basis. The Assessing Officer has applied the Net Profit @10%, which is very reasonable and proper. He has relied upon the orders of the authorities below.

5.5. Having considered the rival submissions as well as the relevant material on record, it is noticed that the Assessing Officer has issued a notice u/s.133(6) (of Income Tax Act, 1961) to M/s.Nagarjun Construction Co., calling for information regarding total payments made to the assessee, such income has confirmed the payment vide two TDS certificates, one of Rs.59,70,453/-, which was declared by the assessee in the books of accounts as well as in the return of income and the other one for Rs.15,58,492/-. The Assessing Officer was of the view that the second payment of Rs.15,58,492/- was not accounted and disclosed by the assessee and therefore the Assessing Officer has added the said amount to the gross receipts of the assessee. Further, there are some claims of fuel expenses, prior to commencement of the business which are not allowable deduction, therefore the Assessing Officer has held that the book results of the assessee are not giving a true picture of the affairs of the business of the assessee. Accordingly, the Assessing Officer rejected the books of accounts by invoking the provisions of Section 145(3) (of Income Tax Act, 1961). It is pertinent to note that the assessee has not challenged the rejection of books of account and therefore in such a situation, the Assessing Officer is bound to complete the assessment on the basis of best judgment. The Assessing Officer is required to estimate the income of the assessee as per the provisions of Section 145(3) (of Income Tax Act, 1961) r.w.s. 144 (of Income Tax Act, 1961), by applying some reasonable and proper criteria. So far as the rejection of books of accounts and estimation of the income, it is a natural consequence while framing the assessment after invoking the provisions of Section 145(3) (of Income Tax Act, 1961). However, the mere rejection of the books of account would not is so facto result an addition if the profit declared by the assessee is either in the line with the past history or better than the past history of profit declared by the assessee. The Gross Profit and Net Profit declared by the assessee in the preceding year is a reasonable and proper guidance for estimating the income after rejection of books of accounts. The Assessing Officer has applied Net Profit @10% before depreciation against the Net Profit declared by the assessee @5.70%, it is evident from the assessment order that the Assessing Officer has not cited any comparable case or any supporting material to justify the adoption of Net Pet @10%. It is pertinent to note that the Net Profit @5.85% declared by the assessee for the AY.2007-08 and Net Profit @3% declared by the assessee for the AY.2009- 10 was accepted by the Assessing Officer. Thus, the Net Profit declared by the assessee in the preceding year as well as in the subsequent year, which was accepted by the Assessing Officer is a reasonable and proper guidance to estimate the income for the year under consideration. Having considered the fact that the Net Profit declared by the assessee is more than the average of Net Profit for the AYs.2007-08 and 2009-10, then, even after rejection of books of accounts, no trading addition is called for.

5.6. As regards the addition made to the gross receipts of the assessee on account of the receipt from M/s.Nagarjun Construction Co., for Rs.15,58,492/- it is noted that in response to notice u/s.133(6) (of Income Tax Act, 1961), the said company has furnished information of payment of Rs.59,70,453/- as well as Rs.15,58,492/- to the Assessing Officer. The Assessing Officer further noted that both the TDS certificates are dated 21-06- 2008. The assessee has not disputed the fact that he has reported only Rs.59,70,453/- but contended that this amount of Rs.15,58,492/- is part and parcel of Rs.59,70,453/-.

However, this is not the fact appearing from the certificates issued by M/s.Nagarjun Construction Co. Though the payment was not received by the assessee during the year under consideration, however, once the said payment was accrued and become due in the year under consideration, the actual receipt of the payment becomes irrelevant when the assessee is following the Mercantile System of accountancy. Since the assessee has not claimed the TDS credit against the said amount, therefore, the corresponding TDS credit shall be allowed to the assessee once the said amount is added to the gross receipt of the assessee. Hence, to the extent of the addition of Rs.15,58,492/- in the gross receipts is confirmed. Ground Nos.4 & 6 are partly allowed.

6. Ground No.5 is regarding protective addition so made by the Assessing Officer on account of un-explained capital introduced by the two partners of assessee-firm. The Assessing Officer noted that during the year under consideration, there is a change in the constitution of the partnership firm as two new partners were introduced in place of two out going partners. These two partners have invested a total capital of Rs.4,36,830/- but they are not assessed to tax. Accordingly, the Assessing Officer held that the said amount of capital introduced by two partners is liable to be added in their hands on substantive basis as well as in the hands of the assessee- firm on protective basis.

6.1. Having considered the rival contentions and material on record, it is noticed that since the Assessing Officer has made only protective addition in the hands of assessee-firm and proposed to make a substantive addition in the hands of partners, therefore, the fate of the protective addition is depending on the outcome of the substantive addition made in the hands of the partners. Nothing has been brought on record about the substantive addition, if any, made in the hands of the partners of the assessee-firm and further, whether the said addition was challenged and sustained by the CIT(A) or not?

Accordingly, in view of the facts and circumstances of the case when the impugned order was passed by the CIT(A) ex-parte and without considering this material fact of the outcome of the substantive addition, if any, in the hands of the partnership firm, this issue is set aside to the record of the CIT(A) for fresh adjudication, after considering the outcome of the substantive addition, if any, made in the hands of the partners. Needless to mention that assessee should be given a fair opportunity of hearing, before passing a fresh order.

7. In the result, the appeal of assessee is treated as partly allowed for statistical purposes.

Order pronounced in the open court on 4th November, 2020

Sd/-

(VIJAY PAL RAO)

JUDICIAL MEMBER

Allahabad,

Dated: 04-11-2020