M/s Sophia Study Circle, Cuttack V. ITO, Cuttack

ITA 81/CTK/2010

• Counselvise Citation: 8122114 RSA 2010
• Duration Of Justice: 1 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-12-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 29-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 09-03-2010
• Court: TRIBUNAL
• Department Lawyers: AND OTHER AGAINST
• Keywords: Income from undisclosed sources; Assessment record
• Section: 145; 142(1)

Judgement Text

IN THE INC O ME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE : SHRI K.K.GUPTA, AM , AND SHRI K.S.S.PRASAD RAO, JM ITA NO.81/CTK/2010 (ASSESSMENT YEAR 2006 - 07) ITA NO. 144 /CTK/2010 C.O.NO.16/CTK/2010 (FILED BY ASSESSEE) (ASSESSMENT YEAR 2006 - 07) M/S.SOPHIA STUDY CIRCLE, LINK ROAD, CUTTACK PAN: AAEFS 6101 N .. APPELLANT - VERSUS - INCOME - TAX OFFICER, WARD 2(1), CUTTACK. .. RESPONDENT INCOME - TAX OFFICER, WARD 2(1), CUTTACK. .. APPELLANT - VERSUS - M/S.SOPHIA STUDY CIRCLE, LINK ROAD, CUTTACK PAN: AAEFS 6101 N .. RESPONDENT FOR THE ASSESSEE : SHRI SUNIL MISHRA, AR FOR THE DEPARTMENT: SMT. PARAMITA TRIATHY, DR DAT E OF HEARING : 29.11.2011 DATE OF PRONOUNCEMENT : 02.12.2011 ORDER SHRI K.K.GUPTA, AM : THESE ARE CROSS APPEALS, FILED ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE AGAINST THE ORDER DT.08.12.2009 OF THE COMMISSIONER OF INCOME - TAX (A PPEALS) FOR THE ASSESSMENT YEAR 2006 - 07. THE ASSESSEE H AS ALSO FILED CROSS OBJECTION ON THE APPEAL FILED BY THE REVENUE. 2. THE FACTS AS BROUGHT OUT ON RECORD ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM CARRYING ON PROFESSION OF IMPARTING COACHING AND TRAI NING TO ACADEMIC AS WELL AS NON - ACADEMIC STUDENTS. IN COURSE OF BUSINESS IT GOT A SCOPE TO ACT AS THE FRANCHISED TRAINING CENTER FOR VARIOUS INSURANCE COMPANIES LIKE BAJAJ ALLIANZE, LIFE INSURANCE CO. LTD., AND ICICI PRUDENTIAL ETC. A SURVEY OPERATION WAS CONDUCTED U/S.133A OF THE INCOME - TAX ACT,1961 ON 07.03.2008 IN THE OFFICE PREMISES AT CUTTACK AND BRANCH OFFICE AT BHUBANESWAR, WHEN NO BOOKS OF ACCOUNTS WERE PRODUCED WITH SOME PLEA OR OTHER. THE ASSESSEE FILED RETURN OF INCOME ON 19.3.2008 IN RESPONSE TO NOTICE ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 2 U/S.148 DISCLOSING TAXABLE INCOME AT 28,44,040. IN THE ASSESSMENT MADE U/S.144, IN THE ABSENCE OF ACCOUNTS PRODUCED BY THE ASSESSEE, THE ASSESSING OFFICER MADE VARIOUS ADDITION S ON ACCOUNT OF INCOME FROM UNDISCLOSED SOURCES, UNEXPLAINED LIABILITIES AND DISALLOWANCE OF EXPENSES AND COMPLETED THE ASSESSMENT ON A TOTAL INCOME OF 1,42,24,880. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE COMMISSIONER OF INCOME - TAX (APPEALS). 3. THE LEARNED CIT(A) ON THE ASSESSEE - APPELLANTS CONTENTION CONSIDERED THE CASE ON THE GROUNDS AGITATED BEFORE HI M BY GIVING PART RELIEF ON CONSIDERING THE DISCLOSURE OF THE EXPENSES CLAIMED VIS - - VIS THE DOUBLE TAXATION OF DISALLOWANCE OF THE SAME EXPENSES COMPUTED BY THE ASSESSING OFFICER UNDER THE PROVISIONS OF SECTION 144 R.W.S. 145. HE CONSIDERED THE ASSESSMENT U/S.144 WAS TO CONSEQUENTIALLY FOR DISALLOWANCE OF SALARY AND INTEREST TO THE PARTNERS WHICH WAS NOT THE CASE WITH THE ASSESSING OFFICER. HE CONSIDERED THE REPEATED CALLING FOR BOOKS OF ACCOUNT FROM THE COUNSEL FOR THE ASSESSEE WHEN IT WAS INTIMATED THAT THE ASSESSEE IS HELPLESS IN PROVIDING THE BOOKS OF ACCOUNT WHEN THE PROFESSIONALS ASSISTING HIM IN THE PROCEEDINGS HAD LEFT WITH THE BOOKS WITH THEM AND FOR THE REASONS BEST KNOWN TO THEM HAVE NOT PRODUCED THE SAME BEFORE THE AUTHORITIES. THE LEARNED CIT(A ) ALSO FURTHER CONSIDERED THE DOUBLE TAXATION OF THE EXPENSES DISALLOWED BY GIVING PART RELIEF IN THE MANNER WHEN THE ASSESSING OFFICER HAD TRIED TO COMPUTE THE PURPORTED INCOME NOT DISCLOSED TO THE ASSESSING AUTHORITIES BEING THE CREDITS IN THE BANKS VIS - - VIS THE TDS CERTIFICATES ON RECORD. THE LEARNED CIT(A) OBSERVED THAT THE DIFFERENCE OF RECEIPTS AND THE CREDITS IN THE BANK CANNOT BE TAXED SIMULTANEOUSLY . HOWEVER, THE LEARNED CIT(A) CONFIRMED THE BILLS RECEIVABLE HOLDING A VIEW THAT THE RECEIVABLES WERE TO BE VERIFIED BY THE ASSESSING OFFICER WHO HAD TO PROCEED WITHOUT THE BOOKS OF ACCOUNT U/S.144 ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 3 R.W.S. 145. THE LEARNED CIT(A) WAS, HOWEVER, GRACIOUS TO REDUCE THE DISALLOWANCE OF EXPENDITURE WHICH THE ASSESSING OFFICER HAD DISALLOWED AT 20% OF THE T OTAL EXPENSES CLAIMED TO 10% ONLY. 4. THE REVENUE IS IN APPEAL ON THE SOLITARY ISSUE THAT THE LEARNED CIT(A) DELETED THE DISALLOWANCE OF RECEIPTS NOT DISCLOSED TO THE DEPARTMENT VIOLATING THE PROVISIONS OF RULE 46A IN THE LIGHT OF THE FINDING THAT THE ASSE SSING OFFICER HAD PROCEEDED TO COMPUTE THE INCOME UNDER THE PROVISIONS OF SECTION 144. THIS ISSUE THEREFORE HAS LINKING TO THE ENHANCEMENT BY THE LEARNED CIT(A) OF THE BILLS RECEIVABLE AMOUNTING TO 4,17,288 WHICH THE ASSESSEE CLAIMS TO HAVE ALREADY BEEN TAXED BUT WAS TO BE CONSIDERED AS FOR THE FINDING OF THE LEARNED CIT(A) WHEN HE HAS CHOSEN TO DELETE THE DIFFERENCE BETWEEN THE RECEIPTS , THE BANK CREDITS AND ULTIMATELY ADJUSTMENT OF OVERLAPPING P ERIOD OF TRAINING CONDUCTED IN TWO FINANCIAL YEARS. IN THIS VIEW OF THE MAT T ER, THE LEARNED CIT(A) ENHANCED THE AMOUNT OF DISALLOWANCE AFTER HAVING DELIBERATED ON THE ISSUE AS PER THE FACTS BROUGHT ON RECORD BY THE ASSESSING OFFICER . THE REVENUE IS ONLY C ONCERNED THAT THE INFORMATION WAS MADE AVAILABLE U/S.133(6) WAS THEREFORE REJECTED BY THE LEARNED CIT(A) VIOLATING THE PROVISIONS OF RULE 46A. 5. THE CROSS OBJECTION FILED BY THE ASSESSEE IS SUPPORTING THE ORDER OF THE LEARNED CIT(A) TO THE EXTENT THAT THE RE WAS NO VIOLATION WHEN THE FACTS AND FIGURES AVAILABLE IN THE ASSESSMENT RECORD ITSELF WERE SIMPLY TO BE COMPUTED IN THE MANNER AS PER THE PROVISIONS OF THE I.T.ACT AND ACCOUNTING STANDARD FOLLOWED BY THE CA IN CERTIFYING THE FINANCIAL STATEMENTS IN ACCO RDANCE WITH THE REPORT IN FORM 3CD AS PER SECTION 44AB. 6. WE TAKE UP ALL THESE TOGETHER AS RIGHTLY NOTED ABOVE TH A T THE ISSUES ARE CONNECTED TO THE EXTENT THAT THE FACTS FOUND BY THE ASSESSING OFFICER ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 4 WERE ON THE BASIS OF FINANCIAL STATEMENTS WHICH WERE P REPARED ON THE BASIS OF BOOKS OF ACCOUNT PHYSICALLY AVAILABLE TO THE AUDITORS WHO HAVE CERTIFIED THAT THE FINANCIAL STATEMENTS FIGURES ARE CORRECT W HICH THEY HAVE TO REPORT AS TRUE AND FAIR IN THEIR REPORT IN FORM 3CD/ 7. THE LEARNED COUNSEL FOR THE ASSESS EE SUBMITTED THAT THE LEARNED CIT(A) GOT SWAYED FROM THE ASSESSMENT ORDER AS WITHOUT ISSUING NOTICE FOR ENHANCEMENT UNDER THE PROVISIONS OF SECTION 251(2) , HE OPINED THAT THE ASSESSING OFFICER WAS TO DISALLOW THE CLAIM OF SALARY AND INTEREST TO THE PARTNE RS HAVING PASSED THE ORDER U/S.144. THE LEARNED CIT(A) CONTRADICTED HIS FINDING BY RECTIFYING THE PATENT MISTAKES WHICH THE ASSESSING OFFICER OBSERVED WAS DUE TO NON - PRODUCTION OF BOOKS OF ACCOUNT WAS TO PROCEED PASSING THE ORDER AS IF MAKING A BEST JUDGME NT ASSESSMENT UNDER THE PROVISIONS OF SECTION 144. THE CA HAD CERTIFIED THAT THEY HAD PHYSICALLY VERIFIED THE BOOKS OF ACCOUNT AND ALSO THE FIGURES THAT HAD BEEN ADOPTED FOR ADDITIONS AND DELETIONS WERE INSCRIBED IN THE BOOKS OF ACCOUNT WHEN THE ASSESSING OFFICER CHOSE TO INSIST ON THE PRODUCTION OF BOOKS OF ACCOUNT AND THE ASSESSEE SHOWED ITS INABILITY TO PRODUCE THE SAME WHEN THE COUNSEL AND THE ACCOUNTANT JOINTLY POSED ITS ABSENCE. THE ASSESSING OFFICER PASSING THE ORDER U/S.144 ALLOWED THE STATUS OF THE FIRM AS SUCH AND ALSO DID NOT CONSIDER THE DISALLOWANCE OF INTEREST AND SALARY TO THE PARTNERS WHEN HE CONSIDERED THE DISALLOWANCE OF THE MAJOR EXPENDITURE WHICH THE LEARNED CIT(A) GRACIOUSLY DELETED PARTLY. IT WAS NOT THE CASE OF THE LEARNED CIT(A) TO BA LANCE THE DELETION OF THE EXPENSES TO THE DISALLOWANCE OF SALARY AND IN TEREST TO THE PARTNERS BECAUSE THE ASSESSING OFFICER HAD ERRED IN TAKING THE NET PROFIT AS PER THE P & L ACCOUNT WHEN THE AUDITORS HAD CERTIFIED APPROPRIATION OF THE PROFITS AMONGST T HE PARTNERS IDENTIFYING THE SALARY AND INTEREST TO THE ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 5 PARTNERS IN ACCORDANCE WITH THE PROVISIONS OF THE PARTNERSHIP DEED WHEN THE ASSESSING OFFICER CHOSE TO ALLOW THE REGISTRATION OF THE FIRM AS SUCH. THE LEARNED COUNSEL FOR THE ASSESSEE THEREFORE VEHEMEN TLY ARGUED THAT AN ERROR IN DISALLOWING THE EXPENSES CANNOT BE A GROUND HAVING PASSED THE ORDER U/S.144 WHICH THE LEARNED CIT(A) MISCONSTRUED WHEN THE LAW CLEARLY PROVIDES THAT THE ASSESSING OFFICER MAY PROCEED AFTER INVOKING THE PROVISIONS OF SECTION 145 , AS IF HE PASS ED THE ORDER U/S.144. HE PRAYED THEREFORE THAT THE INTENTION OF THE ASSESSING OFFICER TO DISALLOW THE EXPENSES WHICH INCIDENTALLY ARE ALLOWABLE AS PER THE ACT WHEN THE SALARY AND INTEREST TO PARTNERS HAVE BEEN TAXED BY THE ASSESSING AUTHORITI ES IN THE CASE OF THE INDIVIDUAL PARTNERS, WHO HAD FURNISHED THEIR RESPECTIVE RETURNS INCLUDING THESE INCOMES , WAS NOT FOR ENHANCEMENT . 8. ON THE NEXT ISSUE WHICH THE LEARNED CIT(A) HAS CONFIRMED, HE SUBMITTED THAT THE AO COMPUTED THE GROSS RECEIPTS AND TH E CREDITS IN THE BANK WHEN THE ASSESSING OFFICER PROPOSED TO CONSIDER THE BILLS RAISED FOR THE EARLIER YEAR RECEIVED IN THE IMPUGNED ASSESSMENT YEAR. AFTER HAVING ACCEPTED THE RECONCILIATION, HE FOUND THAT THE BANK HAD DEPOSITS OF 54,62,210 WHICH HAD NOT BEEN RENDERED TO TAX WAS CLARIFIED BY THE LEARNED CIT(A) IN HIS ORDER INSOFAR AS HAVING RECONCILED THE SAME HE FOUND THAT THE RECEIPTS HAD BEEN RENDERED TO TAX AND THE BILLS RECEIVABLE SHOWN IN THE BALANCE SHEET WERE 17,32,428 O NLY. ON THE ASSESSEE - APPELLANTS SUBMISSION HE FOUND THAT THE ASSESSEE HAD SHOWN LESS BILLS RECEIVABLE TO THE EXTENT OF 4,17,288 WHICH HE CONFIRMED FOR ADDITION BUT FORGOT TO INDICATE AS TO HOW THE TOTAL RECEIPTS WHICH HAD ALREADY BEEN INCLUDED AS IN THE ASSESSMENT ORDER ON PAGES 10 AND 11 CAN BE LOST SIGHT OF. IN OTHER WORDS, THE LEARNED CIT(A) ERRED IN MAKING THE ADDITION OF 4,17,288 WHEN HE HIMSELF AGREED TO THE ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 6 PROPOSITION THAT THE TOTAL AMOUNT OF GROSS RECEIPTS AS PER THE TDS CERTIFICATES INCLUDED THIS SUM TOTAL 1,90,98,850. IN ANY CASE, THE AMOUNT RECEIVABLE CANNOT BE TAXED INSOFAR AS UNDER THE MERCANTILE SYSTEM OF ACCOUNTING A AMOUNT RECEIVABLE HAS ALREADY BEEN RENDERED TO TAX FROM WHICH THE INCOME HAS TO BE DERIVED IN THE P & L ACCOUNT. 9. ON T HE LAST ISSUE WITH RESPECT TO THE SUSTENANCE OF THE DISALLOWANCE OF EXPENDITURE OF 10% WHEN THE LEARNED CIT(A) WAS APPRISED OF THE FACT THAT THE ASSESSING OFFICER HAS SOUGHT TO COMPARE THE ASSESSEES OWN CASE FOR THE LATER TWO YEARS WHEN THE HIGHER RATE OF RETURNS WERE DISCLOSED BY THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT IN NO WAY INVOKING THE PROVISIONS OF SECTION 145 COULD BE RESORTED TO FOR THE PURPOSE OF BRINGING ON RECORD EVIDENCES AND FIGURES PERTAINING TO OTHER YEARS OF THE ASS ESSEE. THE AUTHORITIES BELOW MISDIRECTED THEMSELVES TO HOLD A VIEW THAT THE ASSESSEE IS EITHER MANUFACTURING OR TRADING CONCERN TO RETURN REASONABLE GROSS MARGIN WHICH WAS NEVER THE CASE OF THE ASSESSEE. AS MENTIONED EARLIER THE ASSESSEE IS IMPARTING TRAIN ING OF SUCH INSTITUTIONS WHO SE STANDING O N THEIR OWN REQUIRED THE ASSESSEE TO INVOLVE PARAPHERNALIA SUCH AS CUSHION SEATS, AIR CONDITIONER, COMPUTER H ARDWARE AND EMPLOYMENT OF STAFF WHICH CAN BE TEMPORARY BUT RESULTING IN INCREASE OF EXPENDITURE BY THE PAS SAGE OF TIME. IN OTHER WORDS, THE EARNED COUNSEL PERUSED THE CONDUCT OF THE BUSINESS OF THE ASSESSEE IN THE MANNER THE FIXED OVERHEADS ARE TO BE MADE IN THE INITIAL STAGE WHEN INSTITUTIONS LIKE SBI, LCI, ICICI AND BIRLA SUN LIFE WERE PATRONIZING THE ASSESS EE TO MAKE A CERTAIN BENCH MARK FOR QUALITY WHICH WOULD GIVE A CASCADING EFFECT WAS TO BE BORNE IN THE INITIAL YEAR WHICH FRUITS WERE PLUCKED IN THE SUBSEQUENT YEAR. AFTER HAVING MADE THE FIXED EXPENSES WHICH DETAIL WAS GIVEN TO THE ASSESSING OFFICER, THE VARIABLE COSTS REDUCED IN THE ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 7 SUBSEQUENT YEARS THEREFORE COULD NOT BE COMPARED FOR EITHER DISALLOWANCE OF EXPENDITURE IN THE IMPUGNED YEAR OR FOR DISALLOWANCE OF INCOME IN THE SUBSEQUENT YEAR. THIS YEAR S EXPENSES THEREFORE WERE NOT COMPARABLE TO OTHER YEA RS WAS CONSIDERED PARTLY APPROPRIATE BY THE LEARNED CIT(A) BUT REDUCED THE DISALLOWANCE FROM 20% TO 10% WHICH IS HIGHLY UNJUSTIFIED AS IT HAS GOT NO BASIS OR LOGICAL FINDINGS. HE PRAYED THAT THE AO WAS TO COMPUTE THE BEST JUDGMENT UNDER THE PROVISIONS OF SECTION 144, THEREFORE, OUGHT TO HAVE CONSIDERED THE AUDITED FINANCIAL STATEMENTS WHICH INDICATED A HIGHER EXPE NSE CLAIMED IN THE YEAR VIS - - VIS LOWER EXPENSES CLAIMED IN THE SUBSEQUENT YEAR RESULTING IN HIGHER MARGIN IN THE SUBSEQUENT YEAR WHICH MAY KINDL Y BE CONSIDERED BY GIVING AN APPROPRIATE DIRECTION TO THE ASSESSING OFFICER FOR DELETING THE RESIDUAL DISALLOWANCE OF EXPENDITURE. 10. THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. HAVING BEEN AGGRIEVED BY THE LEARNED CIT(A) VIOLATING THE P ROVISIONS OF RULE 46A, SHE SUBMITTED THAT THE ASSESSEE CANNOT TAKE ADVANTAGE OF NON - PRODUCTION OF BOOKS OF ACCOUNT ON THE REPEATED INSISTENCE OF THE ASSESSING OFFICER WHEN HE WAS CONSTRAINT TO INVOKE THE PROVISIONS OF SECTION 145 AND THE LAW PROVIDES THAT HE MAY PASS THE ORDER U/S.144. SHE FULLY SUPPORTED THE ENHANCEMENT MADE BY THE LEARNED CIT(A) TO THE EXTENT THAT THERE WAS A DIFFERENCE BETWEEN THE BILLS RECEIVABLE AS COMPUTED BY THE ASSESSEE HIMSELF WHICH OUGHT TO HAVE BEEN BROUGHT TO TAX IN ACCORDANCE W ITH THE PROVISIONS OF THE I.T.ACT. THE LEARNED CIT(A) ALSO CONSIDERED SUSTAINING DISALLOWANCE OF 10% FO THE EXPENSES AS THE ASSESSEE HAS NOT EXPLAINED THE NATURE OF EXPENSES WHICH HAVE TO BE ALLOWED IN FULL. THE COMPARISON BETWEEN THE EARLIER AND LATER YEA R WAS A NECESSARY TOOL IN THE HANDS OF THE ASSESSING OFFICER WHICH THE LEARNED ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 8 CIT(A) RIGHTLY PARTLY DELETED. SHE FULLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. CO NSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO FIND FAVOUR IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE TO THE EXTENT THAT IT WAS NOT THE CASE OF THE ASSESSING OFFICER WHO MAY HAVE PASS ED THE ASSESSMENT ORDER U/S.144 ONL Y BECAUSE HE HAD INVOKED THE PROVISIONS OF SECTION 145. THE COMPLIANCES TO THE NOTICES U/S.143(2) AND SECTION 142(1) WERE REGULARLY BEING MET BY THE ASSESSEE WHEN THE PROFESSIONALS INVOLVED IN PRODUCING THE BOOKS OF ACCOUNT AT THE TIME OF HEARING INDICATED THEIR INABILITY TO BRING ON RECORD DUE TO EACH OTHER FINDING FAULT AMONGST THEMSELVES. THIS PROFESSIONAL NEGLIGENCE THEREFORE COULD NOT ATTRIBUTE TO THE FINDING OF THE LEARNED CIT(A) TO AN ORDER PASSED U/S.144 IN CASE OF REGISTERED FIRM WHICH REQUIRES TO DISALLOW THE CLAIM OF THE ASSESSEE FIRM THE EXPENSES INCURRED FOR SALARY AND INTEREST TO THE PARTNERS. THE ASSESSING OFFICER HAD ERRONEOUSLY CONSIDERED THE NP AS PER THE P & L ACCOUNT WITHOUT CONSIDERING THE APPORTION THEREOF TO THE PARTNERS IN THE FORM OF SALARY AND INTEREST WHEN HE CHOSE TO ALLOW THE REGISTRATION TO THE ASSESSEE AS A FIRM AS SUCH. HIS INABILITY TO GET THE BOOKS OF ACCOUNT AND ALSO INVOKE THE PROVISIONS OF SECTION 145 WAS NOT CONCLUSIVE TO THE FACT THAT THE AUDITORS WHO HAVE CERTIFIED THAT THE BOOKS OF ACCOUNT WERE VERIFIED TO REPORT U/S.44AB THEREFORE WERE ACCEPTED BY THE ASSESSING OFFICER WHEN HE FORMULATED HIS OWN METHOD OF COMPUTING THE MISSING INCOME IN THE FORM OF CREDITS IN THE BANKS, TDS CERTIFICATES AND RECEIVABLES. IT WAS AN EXERC ISE BY THE LEARNED CIT(A) WHO COMPUTED THE RECEIVABLES WHICH WERE NOT DISCLOSED WHEN THE ASSESSEE APPELLANT RECONCILED THE RECEIVABLES AS DISCLOSED IN THE BALANCE ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 9 SHEET. THEREFORE, IT WAS ONLY A MISINTERPRETATION OF THE FACTS ALREADY DISCLOSED IN THE FINAN CIAL STATEMENTS BY BOTH THE AUTHORITIES. THIS FURTHER ENHANCES THE CLAIM OF THE ASSESSEE IN THE FORM OF THE LEARNED CIT(A) DELETING THE EXPENSES DISALLOWED WHEN THE ASSESSING OFFICER HAD TRIED TO BRING TO TAX INCOME FROM UNDISCLOSED SOURCES AND ON THE BASI S OF COMPARISON OF THE DATE OF RETURN ACCORDING TO THE GROSS RETURNS FOR THE SUBSEQUENT YEAR. THE PERCENTAGE METHOD ADOPTED BY THE ASSESSING OFFICER THEREFORE W AS GIVEN A GO BYE THE LEARNED CIT(A) WHEN HE CHOSE TO CONFIRM THE DISALLOWANCE OF SALARY AND INT EREST TO PARTNERS IN THE GARB OF THE PROVISIONS OF THE I.T.ACT W HEN IT WAS NOT THE CASE BEFORE THE ASSESSING OFFICER . THE LEARNED CIT(A) THEREFORE ENHANCED THE INCOME OF THE ASSESSEE WITHOUT FOLLOWING THE PROCEDURE OF ISSUING NOTICE AS PER THE REQUIREMENT OF SECTION 251(2). WE DO NOT FIND ANY MERIT IN THE LEARNED CIT(A) CONFIRMING THE DISALLOWANCE OF SALARY AND INTEREST TO THE PARTNERS INSOFAR AS THE ASSESSING OFFICER HAD ALLOWED THE SAME BUT ERRED IN COMPUTING THE INCOME AS PER THE NP BEFORE PAYMENT OF SA LARY AND INTEREST TO THE PARTNERS INCOMPLIANCE TO THE PROVISIONS OF SECTION 40(B). WE DO NOT FIND ANY INFIRMITY IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE DELETING OF INCOME AS PER THE PROVISIONS OF SECTIN 145 BY THE LEARNED CIT(A) COULD NOT BE RELATED TO UPHOLDING THE DISALLOWANCE OF SALARY AND INTEREST TO THE PARTNERS WHEN THE ASSESSING OFFICER MAY HAVE PASSED THE ORDER U/S.144 WAS NOT BECAUSE THE BOOKS OF ACCOUNT WERE NOT PROVIDED BUT BECAUSE HE HAD MADE DISALLOWANCE AND ADDITION S ON THE BASIS OF AUDITED FINANCIAL STATEMENTS WHICH THE CA HAD CERTIFIED WERE IN ACCORDANCE WITH THE BOOKS OF ACCOUNT WHICH THEY HAD PHYSICALLY VERIFIED AT THE TIME OF CONDUCTING THE AUDIT. THIS DISALLOWANCE OF SALARY AND INTEREST TO PARTNERS IS THEREFORE DIRECTED TO BE DELETED. ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 10 12. ON THE BASIS OF FACTS AND FIGURES BROUGHT ON RECORD BY THE ASSESSING OFFICER AND CONSIDERED BY THE LEARNED CIT(A) BY WAY OF A SEPARATE COMPUTATION TO CONFIRM RECEIVABLES NOT SHOWN AMOUNTING TO 4,17,288 COULD NOT BE TAXED IN THE IMPUGNED ASSESSMENT YEAR INSOFAR AS HAVING AGREED TO THE PROVISION OF GROSS RECEIPTS IN ACCORDANCE WITH THE BOOKS OF ACCOUNT AND MATCHING THE FIGURES AS PER THE TDS CERTIFICATES THERE WAS NO ROOM TO TAX THE SAME BYWAY OF A SEPARATE ADDITION WHEN THE IN COME THERE FROM HAD BEEN RENDERED TO TAX AND ACCEPTED. THE LEARNED COUNSEL HAS SUBMITTED THAT THE ASSESSEE IS BASICALLY CONSISTING OF PARTNERS WHO ARE ALL TECHNICAL TEACHERS THEREFORE COULD NOT BE EXPECT ED TO EXPLAIN THE MERCANTILE SYSTEM OF ACCOUNTING IN THE MANNER SO REQUIRED U/S.145 WHEN THE ASSESSING OFFICER RESORTED TO FORMULATE HIS OWN BEST JUDGMENT WHICH WAS RECTIFIED BY THE LEARNED CIT(A). THE ADDITION OF 4,17,288 HAS THEREFORE NO LEGS TO STAND ON AS PER OUR FINDING IN THE ASSESSMENT ORDER READ WI TH THE ORDER OF THE LEARNED CIT(A). THE SAME IS DIRECTED TO BE DELETED. 13. HOWEVER, ON THE LAST ISSUE OF SUSTENANCE OF DISALLOWANCE OF EXPENDITURE AT 10% AS AGAINST 20% DISALLOWED BY THE ASSESSING OFFICER, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSING OFFICER HAD IN A PASSING REFERENCE HAD DISALLOWED 20% WHEN HE HAD CHOSEN TO COMPARE THE ASSESSEES NEXT YEAR RATE OF RETURN ON THE EXPENSES CLAIMED BY THE ASSESSEE AT A LOWER RATE. THE ASSESSEE BEING A TRAINING INSTITUTE WAS OBLIGED TO INCUR HEAVY EXPENDIT URE IN THE FIRST YEAR WHEN HE WAS PATRONIZED BY THE AGENCIES SUCH AS SBI, BIRLA SUN, ICICI WAS TO MAINTAIN THE DIGNITY AND AMBIENCE WHICH RESULTED IN EARNING MORE INCOME IN THE SUBSEQUENT YEAR BUT NO CORRESPONDING HEAVY EXPENDITURE INCURRED IN THE FIRST YE AR, THE LEARNED CIT(A) THEREFORE WAS LIBERAL TO REDUCE THE DISALLOWANCE FROM 20% TO 10%, WHICH WE ITA NO.81/CTK/2010 ITA NO.144/CTK/2010 C.O.NO.16/CTK/2010 11 FURTHER REDUCE TO 5% AS AGREED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE IN ABSENCE OF ANY DETAILS FILED IN SUPPORT OF THE CLAIM OF EXPENDITURES. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. THE APPEAL OF THE REVENUE IS DISMISSED. THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED. SD/ - SD/ - (K.S.S.PRASAD RAO) JUDICIAL MEMBER (K.K.GUPTA) ACCOUNTANT M EMBER DATE: 02.12.2011 H.K.PADHEE, SENIOR PRIVATE SECRETARY. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT: M/S.SOPHIA STUDY CIRCLE, LINK ROAD, CUTTACK 2. THE RESPONDENT: INCOME - TAX OFFICER, WARD 2(1), CUTTACK. 3. THE CIT, 4. THE CIT(A), 5. THE DR, CUTTACK 6. GUARD FILE (IN DUPLICATE) TRUE COPY, BY ORDER, SENIOR PRIVATE SECRETARY.