M/s Tcon Educational Serivices Pvt. Ltd. , Chandigarh V. DCIT, C-1(1), Chandigarh

ITA 1271/CHANDI/2019

AI Insights

The case involves an appeal by Tcon Educational Services Pvt. Ltd. against the order of the Commissioner of Income Tax (Appeals)-1, Chandigarh, which confirmed the action of the Assessing Officer (AO) in rejecting the books of accounts and applying a net profit rate of 40% on the declared turnover. The assessee argued that the books of accounts were rejected without valid reasons and that the estimation of profit at 40% was arbitrary, given the substantial reduction in turnover and fixed expenses. The Tribunal agreed with the assessee, noting that the AO had not considered the past history of the assessee and had improperly compared the assessee with an external entity having a significantly higher turnover.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127560 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 17-01-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 18-09-2019
• Other Referred Cases: CIT vs Agnity India Technologies Pvt. Ltd [93 DTR 375] (Del HC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Rejection of books of accounts; Depreciation
• Section: 271(1)(c); 143(3); 143(1); 48; 145(3)

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “एस.एम.सी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCHES, “SMC” CHANDIGARH ी व म संह यादव, लेखा सद%य BEFORE: SHRI. VIKRAM SINGH YADAV, AM ITA No. 1271/Chd/2019 Assessment Year : 2013-14 M/s Tcon Educational Services Pvt. Ltd. SCO-137-138, 1 st Floor, Sector 8-C Chandigarh The DCIT Circle-1(1) Chandigarh PAN NO: AABCT9528N Appellant Respondent ! " Assessee by : Shri Parikshit Aggarwal, CA # ! " Revenue by : Shri Akashdeep, JCIT, Sr. Dr $ % ! & Date of Hearing : 18/01/2023 '()* ! & Date of Pronouncement : 24/01/2023 आदेश/Order PER VIKRAM SINGH YADAV, AM: This is an appeal filed by the Assessee against the order of the Ld. Commissioner of Income Tax, (Appeals)-1, Chandigarh [hereinafter referred to as ‘CIT(A)’] passed under section 250(6) of the Income Tax Act, 1961 (in short ‘the Act’) dt. 03/06/2019 pertaining to A.Y. 2013-14 wherein the assessee has taken the following grounds of appeal: 1. That on the law, facts and circumstances of the case, the Worthy CIT(A) in Appeal No. 10360/16-17 has erred in passing that order in contravention of the provisions of S. 250(6) of the Income Tax Act, 1961. 2. That on the law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the action of Ld. AO wherein he had rejected books of accounts of the appellant and the provisions of s. 145(3) have been wrongly applied. 3. That on the law, facts and circumstances of the case, the Worthy CIT(A) has erred in partly confirming the action of Ld. AO in as much as the Worthy CIT(A) 2 ordered assessment of income @ 15% (Ld. AO made assessment @ 40%) even when the loss declared by the appellant deserved to be accepted. 4. That on the law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the action of Ld. AO wherein he had not allowed the deduction of depreciation, interest and other statutory/ mandatory deductions from assessed estimated. 5. That on the law, facts and circumstances of the case, the Worthy CIT(A) was unjustified in confirming the action of the Ld. AO wherein he had completed the assessment in haste and without affording reasonable opportunity of being heard. 6. That the appellant craves leave for any addition, deletion or amendment in the grounds of appeal on or before the disposal of the same. 2. During the course of hearing the Ld. AR submitted that the assessee filed its return of income declaring loss of Rs. 37,61,584/- and alleging that books of account have not been produced, the AO rejected the books of account and applied net profit rate of 40% on the declared turnover of Rs. 28,74,000/- and estimated the net profit at Rs. 11,30,762/- as against the loss declared by the assessee at Rs. 37,61,584/- resulting into addition of Rs. 48,92,346/-. Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) who has modified the net profit rate at 15% even when the loss declared by the assessee deserves to be accepted. Against the said findings, the assessee is in appeal before the Tribunal. 3. In this regard, it was submitted by the ld AR that the declared profitability analysis of the assessee for the year under consideration and immediately preceding 3 years were filed before Ld. AO which read as under: A.Y. Turnover/Commission Net Profit Net Profit/Loss (%) 2010-11 2,07,30,252.75 10,81,403.78 5.22 2011-12 2,28,87,670.04 9,39,115.93 4.10 2012-13 55,44,772.00 (19,18,772.72) (34.61) 2013-14 28,26,907.41 (37,61,584.06) (133.06) 3 4. It was submitted that from the above table, it is apparent that the reason for loss in the year under consideraton is substantial reduction in turnover but not the commensurate reduction in fixed expenses. The assessee is an immigration consultant which is a service industry. Within 2 years, i.e. from A.Y. 2011-12 to 2013-14, assessee's turnover reduced from Rs. 228.88 lacs to Rs. 28.27 lacs. The Ld. AO failed to appreciate these facts. It is an undisputed fact that declared turnover of the assessee has been accepted by Ld. AO as profitability rate of 40% has been applied by Ld. AO on this declared turnover only. When there is no dispute in turnover figure and assessee's expense are majorly fixed in nature, the estimation of profitability rate of 40% was extremely harsh and the addition deserves to be deleted. 5. It was further submitted that the assessment for A.Y. 2015-16 of assessee company was framed u/s 143(3) wherein the books were produced. The declared turnover for that year was Rs. 52.19 lacs and declared profit was Rs. 1.60 lacs. Copy of ITR, Computation of Income, Audited Balance Sheet and Assessment order for A.Y. 2015-16 is placed on record. There is no change in facts and nature of business of assessee company in A.Y. 2015-16 than the year in question. When in assessee's own case in succeeding year, in assessment framed u/s 143(3), profitability has been accepted @ 3.08 %, applying profit rate of 40% in the year in question was extremely harsh and appropriate relief may thus be granted. 6. It was further submitted that while framing impugned assessment, the AO has relied upon the profitability figure of M/s International Education Guidance and Care. The said comparable was wrongly adopted as its turnover is almost 10 times the turnover of assessee company. Further, we were not provided with the complete financial data and nature of business activity of the said concern. It has already been laid down in the case of CIT vs Agnity India Technologies 4 Pvt. Ltd [93 DTR 375] (Del HC) that a concern having substantially high turnover than the assessee company cannot be taken as comparable. Therefore, the reliance placed by AO on profitability of M/s International Education Guidance and Care for estimating profit rate of 40% of the assessee was incorrect and the same deserves to be discarded. It was submitted that where assessee's own subsequent year's assessment order passed u/s 143(3) exists, it deserves to be given preference over external comparable. Therefore, application of profitability rate of 40% by Ld. AO is extremely high and appropriate relief be granted to the assessee. 7. Per contra, the Ld. DR taken us through the findings of the Ld. AO which are contained at para 7 which read as under: “ 7. The assessee was asked to explain as to why not NP rate of 40% be applied in his case on rejection of books of accounts. The assessee has given a vague and unacceptable reply which is reproduced above. A similar entity by the name of M/s International Education Guidance and Care is doing business of exactly similar nature as that of assessee i.e. is providing consultancy to send students to foreign universities and colleges. M/s International Education Guidance and Care is showing NP rate of 48 to 51% during the assessment year 2012-13 and 2013-14. The details of that concern is reproduced below:- Name of the entity F.Y. Gross Turnover N.P N.P. Rate M/s International Education Guidance and Care 2011-12 2,19,44,700 1,07,32,820 48.91% 2012-13 2,63,67,290 1,34,68,591 51.0% 8. Since this entity is providing similar nature of services and also operating in the similar foreign area therefore the NP rate of 40% in the case of assessee company is justified. Since the assessee has failed to substantiate his contention or produce any documentary evidence to justify his stand, the rate of Net Profit is taken as 40% and the income of the assessee company is assessed at Rs. 11,30,762/- (28,26,907 X 40%). I am satisfied that the case of the assessee is fit for initiating penalty u/s 271(1)(c) for furnishing inaccurate particulars of income. 8. Further our reference was drawn to the findings of the Ld. CIT(A) which are contained at para 5.2.1 which read as under: “The variation in NP rate is from 4.10 % to (-) 133.06 % and the appellant has failed to produce books of accounts and bills and vouchers under the garb of 5 occurrence of fire on the premises. AO was right in rejecting books of accounts. He has applied NP @ 40% on the basis of comparable. The appellant has failed to rebut the comparable either during assessment proceedings or during appellate proceedings except taking plea of turnover. Further, assessment of subsequent assessment year 2015-16 where appellant has declared Returned Income of Rs.5,36,950/- cannot have bearing on the present case. Principle of res judicata is not applicable to the income tax proceedings. Every year is a separate year. Moreover, Ld AR has not submitted further details regarding AY 2015-16. However, to meet the end of justice NP rate is restricted to 15%. The Grounds of Appeal No. 2 to 5 are partly allowed.” 9. It was submitted that the Ld. CIT(A) has already reduced the net profit rate to 15% and gave the facts and circumstances of the present case, the same should be sustained. 10. We have heard the rival contentions and purused the material available on record. No specific arguments have been taken against the rejection of books of accounts u/s 145(3) and hence, the limited issue under consideration relates to estimation of net profit rate once the books of accounts have been rejected. Given that the books of accounts have been rejected, the Assessing Officer is required to make the assessment on the basis of best judgment and while exercising his discretion, he cannot act arbitrarily or capriciously. The assessment must proceed on judicial considerations in light of relevant material available on record. In other words, in case of best judgment, though the element of guess work is involved, however the guess work should have rationale nexus with the material on record and discretion must not be exercised arbitrarily or capriciously. For the purposes of making the best judgment assessment, past history of the assessee has been held by the Courts as a reliable and reasonable basis for estimation of profits. In absence thereof, comparable cases in the similar line of business could be considered with proper benchmarking analysis. In the instant case, we find that the AO has not considered the past history of the assessee and has compared the results with an external comparable holding it to be in similar line of business as of the assessee. In our view, merely holding the comparable company in similar line of 6 business is only the first step in undertaking a benchmarking analysis. The analysis also needs to consider various other factors and take into consideration functions, risks, and assets employed which apparently has not been undertaken in the instant case and the assessee has also not been confronted with the same. In view of the same, we find that comparing the results of the assessee with an external comparable is not justifiable in the instant case. As against that, the assessee’s past history is very much on record and we find that the assessee has declared net profit rate of 5.22% in A.Y 2010-11, 4.10% in A.Y 2011-12 and has reported net loss of 34.61% in immediately preceding A.Y 2012-13. These results have since been accepted by the Revenue though under section 143(1) proceedings and have thus attained finality. Even for subsequent assessment year 2015-16, net profit declared by the assessee at 3.08% on reported turnover of Rs 52.19 lacs has been accepted by the Revenue under section 143(3) proceedings. We also find that these results which are on declining scale are declared on reduced turnover over the past and subsequent years which have been accepted by the Revenue and thus lend credence to the assessee’s submission that its profitability has been effected due to reduced turnover without commensurate reduction in fixed costs. No justifiable basis has been stated by the ld CIT(A) while estimating the net profit rate at the rate of 15% which is again arbitrary and no linkage with any material or past history of the assessee. In light of aforesaid discussions and in the entirety of facts and circumstances, we see no justifiable basis to disturb the declared results by the assessee even where the books of accounts have been rejected and the addition so made by estimating the net profit rate at the rate of 40% and sustenance thereof by the ld CIT(A) at 15% is hereby directed to be deleted. In the result, ground no. 3 of the assessee’s appeal is allowed. 11. In light of above, other grounds of appeal are dismissed as infructious. 7 12. In the result, the appeal of the assessee is allowed. (Order pronounced in the open Court on 24/01/2023) Sd/- व म संह यादव (VIKRAM SINGH YADAV) लेखा सद%य / ACCOUNTANT MEMBER AG Date: 24/01/2023 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. $ / 0 1 The CIT(A) 5. - 2 ग 4 5 & 4 5 678 ग9 DR, ITAT, CHANDIGARH 6. ग 8 : % Guard File