M/S Deluxe Roadlines Pvt. Ltd.,, ... vs Assessee

M/s. Deluxe Roadlines Pvt. Ltd., Vs. The Deputy Commissioner of # 79, 4th Cross, N.R. Road, Income Tax, Kumbalgundi, Kalasipalayam, Circle 11(1), Bangalore - 560 002. Bangalore. PAN: AAACD 5875F

APPELLANT RESPONDENT

Appellant by : Shri V. Srinivasan, CA Respondent by : Shri P. Dhivahar, Jt. CIT(DR)

Date of hearing : 01.07.2015 Date of Pronouncement : 10.07.2015

ORDER

Per N.V. Vasudevan, Judicial Member

This appeal by the assessee is against the order dated 30.11.2012

of the CIT(Appeals) pertaining to assessment year 2009-10.

2. In this appeal, the only grievance projected by the assessee is with

regard to the action of the CIT(Appeals) in determining the business

income of the assessee from the business of owning fleet and operating as ITA No.16/Bang/2013 Page 2 of 14

a transport contractor @ 3% of the gross receipts as against 8% estimated

by the AO. According to the assessee, the profit of assessee ought to have

been determined at 1.03% which was the income declared in the return of

income and which is comparable with the past history of profits declared in

its case.

3. The facts and circumstances under which the appeal arises are as

follows. The assessee is a company. It is a fleet owner and transport

contractor. For the AY 2009-10, assessee filed its return of income on

29.9.2009 declaring income of Rs.70,64,490. The freight collection and

sales figures were as follows:-

Freight Collection : Rs.52,45,46,476 Sales : Rs. 39,99,554 -------------------- Total Rs.52,55,46,030 --------------------

The assessee also declared other income at Rs.84,63,079 consisting of

interest income, profit on sale of assets, rental income and miscellaneous

income. The assessee claimed various expenses amounting to

Rs.53,15,55,168 and offered net income of Rs.70,64,490 for taxation in

respect of the business of fleet owning and transport contract. The

assessee's main claim of expenditure was under the two heads viz., Lorry

hire charges at Rs.33,03,90,483 and truck maintenance at Rs.8,39,82,308.

The other expenses include travelling, commission, rent, etc. ITA No.16/Bang/2013 Page 3 of 14

4. There was a survey carried out in the business premises of the

assessee u/s. 133A of the Income-tax Act, 1961 ["the Act"] on 14.7.2011.

In the course of survey, the survey team could not find any bills/vouchers

with regard to various expenses claimed in the P&L account. Only four

files of daily returns of transactions pertaining to Bangalore Head Office for

the periods 1.4.08 to 30.6.08, 1.7.08 to 30.9.08, 1.10.08 to 31.1.09 &

1.2.09 to 31.3.09 were found. Even in these files, the information available

was not clear and no definite conclusions could be arrived at with regard to

nature of expenditure, amount of expenditure etc. A statement of Mr.

Kushal Chand Dharamshi, M.D., was recorded in the course of survey on

14.7.11. In his statement, he stated that supporting vouchers were kept

separately in the Head Office. Even in the HO, no books of accounts or

vouchers were found. Whatever records were available were impounded in

the course of survey and the expenses recorded in those documents were

directed to be substantiated.

5. In the course of assessment proceedings, Mr. Kushal Chand

Dharamshi, M.D. of the company, appeared in response to the notice of the

AO to substantiate the expenses debited in the P&L account with

supporting documents like vouchers, bills, etc. The assessee was also

directed to produce books of account. The assessee did not comply with

the directions of the AO in this regard. Hence a proposal u/s. 144 of the

Act was issued by the AO vide letter dated 17.11.2011 to assess income of

assessee at 8% of the total turnover which was at Rs.52,85,46,030 which ITA No.16/Bang/2013 Page 4 of 14

works out to Rs.4,22,83,682. It was also proposed to add the other income

disclosed by the assessee at Rs.84,63,079. Thus the total income

proposed for assessment was Rs.5,07,46,761. Despite the above notice,

the assessee did not produce books of account, bank statements, bills,

vouchers, in support of expenditure claimed. On the basis of above

sequence of events and failure on the part of assessee to produce

documents called for, the AO came to the following conclusion:-

"From the foregoing, I arrive at the conclusion that either the assessee is not having/maintaining books of account and supporting vouchers/bills towards various expenditure claim or the same are not produced in spite of several opportunities and sufficient time offered to the assessee.

In view of the above, I am not satisfied about the correctness or completeness of the accounts of the assessee. Hence I proceed to make the assessment in the manner provided in sec. 144 of the I.T. Act as stipulated in sec. 145(3) of the I.T. Act."

6. The AO accepted the turnover declared by the assessee in the P&L

account filed as it was in tune with its past history. Thereafter, the AO

proceeded to determine the income of the assessee by applying 8% as

proposed in the show cause notice and determined the income of the

assessee at Rs.4,22,83,682 which is 8% of the turnover under the head

'income from business'.

7. Before the CIT(Appeals), the assessee submitted that, it derives

income from transportation of goods and owns about 100 heavy goods ITA No.16/Bang/2013 Page 5 of 14

vehicle and Light Commercial Vehicles. Sometimes, the Assessee also

engaged third party vehicles by paying hire charges for transportation of

goods. Apart from the transportation business the Assessee also operated

a petrol bunk. This in short was his business activity. As far as

transportation business was concerned, the Assessee submitted that it

owned about 100 heavy goods vehicles and light commercial vehicles.

Judging the extent of income having regard to the presumptive income

mentioned in the Section 44AE of the Act, and assuming further that all the

vehicles are heavy goods vehicles only, the total income of the Assessee

could be worked out, at best, in terms of presumptive provisions at Rs.

42,00,000/- [Rs.3,508/- x 12 x 100]. As far as the business of running

petrol bunk, the Assessee submitted that, the turnover of the Assessee for

the year under appeal from the petrol bunk business was only Rs.

39,99,554/-. In other words, there was almost no business of operating the

petrol bunk carried on by the Assessee during the year under appeal.

8. The Assessee submitted before CIT(A) that it is in the above

background of the nature of business carried on by the Assessee that the

extent of income shown by the Assessee has to be looked at. The

Assessee submitted that the income of Rs. 70,64,490/- offered in the return

of income was reasonable and also commensurate with the business

activities of the Assessee. The Assessee also submitted that it was only

entitled to a small commission of less than Re.1 in its petrol bunk business.

This commission was much less than 1% in this line of activity. Further, the ITA No.16/Bang/2013 Page 6 of 14

extent of income in transportation business was also not very high.

Considering the above extent of income from own vehicles and also the

commission received in respect of engaging third party vehicles and almost

negligible income in the petrol bunk business, it was submitted that the

income of Rs. 70,64,490/- shown by the Assessee was reasonable and in

accordance with the ground realities obtaining in the facts of the

Assessee's case.

9. The assessee also submitted that income declared by it is in tune

with the past history in its own case and therefore addition made by the AO

should be deleted.

10. The CIT(Appeals) firstly upheld the rejection of books of accounts by

the AO. The assessee has accepted this part of the order of CIT(Appeals)

and in the grounds of appeal filed before the Tribunal, there is no challenge

to the validity of rejections of books of account by the AO u/s. 145(3) of the

Act. In this appeal we are concerned only with the estimation of income of

the Assessee.

11. As far as the claim that income declared by assessee should be

accepted, the CIT(A) looked at the past history of the assessee's case

which was as follows:-

ITA No.16/Bang/2013 Page 7 of 14

Year Turnover Profit Percentage Ending (Rs.) (Rs.) 31/3/2004 38,39,12,686 36,40,150 0.95 31/3/2005 50,25,74,388 48,54,614 0.97 31/3/2006 58,97,06,091 11,88,594 0.20 31/3/2007 53,22,23,311 21,38,784 0.40 31/3/2008 55,93,97,896 52,86,974 0.95

12. The ld. CIT(Appeals) found that profit percentage declared by the

assessee in this year was 1.03%. He was therefore of the view that

estimation of 8% of turnover as done by the AO was highly excessive and

unreasonable. He was, however, of the view that 3% of the turnover could

be estimated as profit of the assessee.

13. Still aggrieved, the assessee has filed the appeal before the

Tribunal.

14. This appeal was heard by the Tribunal and an order dated 1.1.2014

was passed by the Tribunal. The Tribunal firstly came to the conclusion

that the assessee failed to demonstrate that it was maintaining books of

account as required under the Act. The Tribunal also held that assessee

has not brought out any evidence to justify the claim of profit at 1.03% of

the turnover, except for placing reliance on the returns of income filed in the

earlier years. The Tribunal held that those returns are not conclusive in the

matter because those returns for AYs 2004-05 to 2008-09 had been

accepted u/s. 143(1) of the Act and acceptance of a return u/s. 143(1) of

the Act will not be conclusive as there was no scrutiny assessment. The

Tribunal therefore came to the conclusion that the CIT(A) was reasonable ITA No.16/Bang/2013 Page 8 of 14

in restricting the determination of income at 3%, as compared to 8% of the

turnover estimated by the AO. The Tribunal further held that the CIT(A)

has not given any comparable cases in similar line of business to come to

the conclusion that 3% of the turnover is reasonable in estimating business

income of the assessee. The Tribunal held that it would meet the ends of

justice if the business income is restricted to 2.5% of the total turnover.

15. The assessee was not satisfied with the relief given by the Tribunal

and filed an appeal before the Hon'ble High Court of Karnataka in ITA

No.213/2014. The following substantial question of law was admitted by

the Hon'ble High Court:-

"Whether the tribunal is justified in law in estimating the appellant's business profit at 2.5% of the total turnover without any basis and contrary to income accepted in the earlier years and recorded a perverse finding on the facts and circumstances of the case?"

16. The Hon'ble High Court referred to the decision of the Hon'ble

Supreme Court in the case of Raghubar Mandal Harihar Mandal v. The

State of Bihar (1957 Vol. VIII STC 770), wherein it was held that when the

returns and books of account are rejected, the AO must make an estimate

and to that extent he must make a guess, but the estimate must be related

to some evidence of material and it must be something more than mere

suspicion. The AO must make a fair estimate for this purpose, he must

take into consideration material before him like assessee's circumstances, ITA No.16/Bang/2013 Page 9 of 14

previous returns and all other matters, which the AO thinks will assist him in

arriving at a fair and proper estimate. Thereafter, the Hon'ble High Court

held as follows:-

"7. Therefore, in the instant case, when the assessee did not produce the books of accounts, the assessing officer was not helpless. The assessee has been filing returns every year. In fact, he has produced five years returns. It is from that they took the turnover because the turnover offered by the assessee for the year 2009-10 was comparable with the past five years turnover as reflected in the returns filed. They acted on that. However, he refused to act on the profits shown in the said returns. No reasons are given for not relying on the said profits at the same time, he has also not taken into consideration the comparable cases in similar business to come to the conclusion. Without any basis, the assessing authority determined the profit at 8%, the first appellate authority reduced it to 3% and the tribunal has reduced it to 2.5%. In coming to the said finding, all the three authorities have declined to take note off the evidence by way of earlier returns. In that view of the matter, what the authorities have done is a mere guess work and without any basis. That is not permissible in law as held by the Apex Court in the aforesaid judgment.

8. In that view of the matter, the impugned orders are unsustainable. Hence, the order passed by the tribunal is hereby set-aside. Matter is remitted back to the tribunal for fresh consideration in the light of the observations made above. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the revenue and appeal is partly allowed."

17. The appeal was fixed for hearing as per the directions of the Hon'ble

jurisdictional High Court. The ld. counsel for the assessee submitted

before us that the Hon'ble High Court has clearly held that evidence in the

form of earlier returns had to be taken note of by the Tribunal. According to ITA No.16/Bang/2013 Page 10 of 14

him, therefore, the assessee's profit declared in the return of income for AY

2009-10 was more than the past history in its own case and therefore the

same ought to be accepted.

18. The ld. DR, on the other hand, submitted that the Hon'ble High Court

has observed that no reasons were given for not relying on the profits

declared by the assessee in the past and also that the revenue authorities

have not taken into consideration comparable cases in similar business to

support its conclusions. According to him, the past history in assessee's

own case is not conclusive in the matter as in none of the earlier

assessment years, the assessee's case was taken up for scrutiny and

whatever profits were declared were accepted u/s. 143(1) of the Act without

any verification. In such circumstances, according to him, it would not be

appropriate to rely on the past history of the assessee's case and the better

way of estimating the profits of the business of the assessee would be to

take profits of comparable cases in similar line of business to that of the

assessee.

19. We have given a very careful consideration to the rival submissions.

In our view, the directions of the Hon'ble High Court in para 7 & 8 of its

judgment dated 14.8.2014 are to the following effect :-

(1) In accepting the turnover of assessee declared in the Profit & Loss

account, the revenue has relied on the past history of assessee's own

case.

ITA No.16/Bang/2013 Page 11 of 14 (2) The revenue authorities have, however, not applied the same

yardstick when it came to determining the profits of the assessee and

for doing so they have not assigned any reasons.

(3) The revenue, in any event, ought to have taken into consideration

comparable cases in similar business to justify estimation of profit.

(4) Therefore, the determination of profits of the assessee was merely a

guess work and without any basis.

20. In our view, the fact that the assessee's returns in the past was

accepted without any scrutiny or verification because those returns were

accepted u/s. 143(1) of the Act, was a proper basis not to rely on the past

history of profits in assessee's own case. Therefore, the past history of

income in assessee's own case cannot be the sole basis on which income

of the assessee can be determined. Besides the above, as pointed out by

the ld. DR in the course of his arguments, at the time of survey u/s. 133A of

the Act, no books of account of assessee were found, nor was the

assessee able to produce evidence in the form of vouchers in support of

expenses debited to the P&L account. As to whether similar state of affairs

prevailed in the past for the AYs 2004-05 to 2008-09 in assessee's case

cannot be said with certainty. According to the ld. DR, similar state of

affairs would have prevailed in the past assessment years also. The profits ITA No.16/Bang/2013 Page 12 of 14

earned by the assessees in similar line of business could therefore be

considered by the AO in determining the income of assessee.

21. We have already observed that rejection of books of account by the

AO is no longer an issue, as the assessee has accepted the rejection of

books of account. When books of accounts are rejected and income is

estimated, the best yardstick for such estimation is the past history in

Assessee's own case, provided such past history is accepted by the

revenue in assessments completed after due enquiry u/s.143(3) of the Act.

When assessment is completed u/s.143(1) of the Act, the return filed by the

Assessee is accepted as it is. The scheme of assessment under section

143(1) of the Income-tax Act, 1961, is the policy of tax administrations

across countries to adopt a two-stage procedure of assessment as part of

risk management strategy. In the first stage, all tax returns are processed

to correct arithmetical mistakes, internal inconsistencies, tax calculation

and verification of tax payment. At this stage, no verification of income is

undertaken. In the second stage, a certain percentage of the tax returns

are selected for scrutiny/audit on the basis of the probability of detecting tax

evasion. At this stage, the tax administration is concerned with the

verification of the income. In India, the scheme of summary assessment

being in force since 1st day of June, 1999 does not contain any provision

allowing for prima facie adjustment. The scope of the present scheme is

limited only to checking as to whether taxes have been correctly paid on

the income returned. Under the existing provisions of section 143(1), there ITA No.16/Bang/2013 Page 13 of 14

is no provision for correcting arithmetical or internal inconsistencies. "The

intimation under section 143(1) is only fictionally taken as a notice of

demand under section 156 of the Act. Like other fictions, to understand the

meaning of this fiction so created here one must look to its purpose. The

apparent purpose of this fiction is to make the machinery provision for

recovery of tax applicable to the recovery of tax assessed in terms of

section 143(1) and nothing more. Though notice of demand under section

156 is to be served in the prescribed form but the intimation under section

143(1) is not in any such prescribed form, yet by fiction so created, all

incidence of notice of demand shall become applicable even to that

intimation, for any statutory fiction must be carried to its logical conclusion.

From all this it follows the intimation is nothing but merely an

acknowledgement slip to the effect that the return filed has been accepted

and the Assessing Officer has acted upon that and for the purposes of

recovery that shall be deemed to be a notice of demand as if issued under

section 156.

22. In our view, therefore, the past history in Assessee's case would not

be the appropriate yardstick to estimate income. We are therefore of the

view that it would be just and appropriate to set aside the order of the

CIT(Appeals) on this issue and remand the question of estimation the

income of the assessee to the Assessing Officer for fresh consideration,

keeping in view the profits earned by the assessees in similar line of

business. The AO will make necessary enquiries in this regard and also ITA No.16/Bang/2013 Page 14 of 14

afford opportunity of being heard to the assessee and thereafter estimate

the income of assessee.

23. For statistical purposes, the appeal of the assessee is treated as

allowed for statistical purposes.

Pronounced in the open court on this 10th day of July, 2015.

Sd/- Sd/-

( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member

Bangalore, Dated, the 10th July, 2015.

/D S/

Copy to:

1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Assistant Registrar/ Senior Private Secretary ITAT, Bangalore.