Raathi Pipes & Profiles Limited V. Commissioner of Income Tax (Appeals)-VI Hyderabad and another

ITTA/408/2013

AI Insights

The case involves M/s. Raathi Pipes & Profiles Limited, which appealed against the decision of the Income Tax Appellate Tribunal that upheld the rejection of their books of account by the Assessing Officer for the assessment year 2007-2008. The primary legal questions revolved around the validity of an 'implied rejection' of the books of account and whether such a rejection was supported by adequate material evidence. The Tribunal and the High Court found that the Assessing Officer's dissatisfaction with the books was justified based on the discrepancies noted in the profit margins and the lack of evidence showing a corresponding increase in sale prices despite rising input costs.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 796370 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 19-09-2013
• Assessment Year: misc
• Other Referred Cases: C.I.T. v. Poonam Rani, Sanjeev Woollen Mills v. C.I.T.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Keywords: Assessing Officer; Assessment Year 2007-2008; Commissioner of Income Tax (Appeals); Estimation of Net Profit; Income tax appellate tribunal; Implied rejection of books of account
• Section: 145

Judgement Text

"IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) PRESENT THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE SRI JUSTICE K.C. BHANU INCOME TAX APPELLATE TRIBUNAL APPEAL NO.408 OF 2013 DATED:19.9.2013 Between: M/s. Raathi Pipes & Profiles Limited A Private Limited Company Incorporated under the provisions of Companies Act, 1956 Having its office at G1 to G4, G11 & G12, Industrial Estate, Suryapet Nalgonda District Rep. by its Director Mr.M. Jayadev … Appellant And Commissioner of Income Tax (Appeals)-VI Hyderabad and another … Respondents THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE SRI JUSTICE K.C. BHANU I.T.T.A. NO.408 OF 2013 JUDGMENT: (per the Hon’ble the Chief Justice Sri Kalyan Jyoti Sengupta) This appeal is filed against the judgment and order dt.17.4.2013 passed by the learned Tribunal, for the assessment year 2007-2008, and is sought to be admitted on the following suggested questions of law: A. “Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal is correct in law in holding that the action of the Assessing Officer amounts to “impliedly rejecting the books of accounts”, in the absence of any finding in the Assessment Order about the correctness or completeness of the accounts or the method of accounting followed by the assessee as required under Section 145 of the Income Tax Act? B. Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal is correct in law in upholding the implied rejection of accounts by the Assessing Officer in the absence of any material on record to show that books of accounts of the Assessee are incorrect or incomplete? C. Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal is correct in law in upholding the implied rejection of accounts by the Assessing Officer without issuing notice to the Assessee? D. Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal erred in ignoring the fact that the statutory records maintained by the Assessee under the Central Excise Act clearly demonstrate the correctness of the cost price and the sale price of the goods sold by the Assessee?” The Assessing Officer has discarded the books of account produced by the assessee at the time of assessment, and thereafter estimated net profit and assessed the income of the assessee. Being aggrieved by this order of the Assessing Officer, an appeal was taken to the Commissioner of Income Tax (Appeals), who found that the rejection of books of account of the assessee by the Assessing Officer was not justified under law and he found that this rejection was based on surmises and conjectures. Therefore, the Commissioner of Income Tax (Appeals) revised the order of the Assessing Officer and passed suitable orders. The Revenue, on being dissatisfied with the judgment and order of the Commissioner of Income Tax (Appeals), approached the Tribunal. The Tribunal reversed the order of the Commissioner of Income Tax (Appeals) and restored the order of the Assessing Officer. The learned Tribunal, taking note of the submissions and also the decisions cited by the parties, has come to a conclusion that the rejection of books of account of the assessee by the Assessing Officer is done impliedly and thereafter examined the estimation of income made by the Assessing Officer and was found to be justified and correct. Learned counsel for the appellant - assessee firstly submits that the rejection of the books of account of the assessee, in spite of documentary evidence produced before the Assessing Officer, was not justified. He says that there cannot be implied rejection of books of account and this must be expressed. The reasons should have been given as it is a part of natural justice as a valuable right is sought to be taken away. He, therefore, submits that the rejection order of the Assessing Officer, even if we assume that implied rejection is possible, is based on surmises and conjectures and no evidence has been brought to discard the books of account. He also says that it is the burden of the Revenue to disprove otherwise regarding the genuineness and correctness of the books of account, so as to pass the order of rejection. He submits that Section 145 of the Income Tax Act, 1961 (for short, ‘the Act’) clearly mentions that satisfaction has to be recorded in the order. He further contends that unimpeachable documents have been produced before the Assessing Officer, who has ignored and did not take into consideration. In support of his submissions, he relied on a judgment of Delhi High Court in C.I.T. v. Poonam Rani[1] and a judgment of the Supreme Court in Sanjeev Woollen Mills v. C.I.T.[2] After considering the submissions of learned counsel for the appellant, it appears that the following two points are material to decide whether this appeal should be admitted or not? i. Whether any implied rejection is permissible under Section 145 of the Income Tax Act, or not? ii. Whether, in this case, the learned Tribunal as well as the Assessing Officer have rejected the books of account without having any material whatsoever? Before we discuss these two points, we set out Section 145 of the Income Tax Act. Method of accounting.- “145. (1) Income chargeable under the head \"Profits and gains of business or profession\" or \"Income from other sources\" shall, subject to the provisions of sub- section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub- section (1) or accounting standards as notified under sub- section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.” It is clear from sub-section (3) of Section 145 of the Act, that it is the absolute subjective satisfaction of the Assessing Officer about the correctness or completeness of the accounts of the assessee. Here, the method of accounting is not under consideration. We are of the view that satisfaction can be deduced from the order, reading as a whole. We think that word “satisfaction” is not required to be mentioned specifically in the order. After reading the entire findings and assessment order, if it is found that satisfaction is reached it is complete compliance of the order. We do not think that such express satisfaction is required. Therefore, we quote the relevant portion of the order of the Assessing Officer, which has been upheld by the Tribunal. “It is abundantly clear from the above that though there is marginal fall in GP ratio, the net profit has been shown at an abysmal low rate of 0.76% compared to that shown in the earlier years, i.e., assessment year 2005-06 at 3.04% and assessment year 2006-07 at 4.32%. Even if the assessee’s claim of increase in the raw material cost is accepted (manufacturing & trading expenses), the assessee has not brought out any evidence on record to show that there is no corresponding increase in the sale price. The accepted and/or cardinal principle of trade is whenever there is an increase in the cost/purchase price, there will be a corresponding rise in the price of sale. The assessee could in no way justify its claim that there is increase in the cost of inputs with there being no corresponding rise in the price of sale. Further, there is no significant increase in the expenses viz. personnel cost, administrative & selling expenses, interest & finance charges, etc. considering the increase in turnover reported from year to year. In short, the increase in output costs is almost insignificant compared to the increase in input costs. As indicated in the preceding paragraphs of this order, the steep decline in the rate of net profit, the assessee cannot, therefore, attribute to the increase in input costs. Therefore, the net profit admitted by the assessee is not free from doubt and does not represent the assessee’s true and fair profits.” We do not think in this case in view of above findings no more words are required to suggest recording of satisfaction of inaccuracy of the books of account. Section 145 of the Act has given unfettered discretion and the discretion has to be exercised judiciously and sparingly. That is what has been held by the Supreme Court in the case of Sanjeev Woollen Mills (supra), cited by learned counsel for the appellant. The question whether this discretion was exercised here judiciously, discretionarily or not, will emanate from logical conclusion. According to us, the discretion has been exercised by the Assessing Officer as he has examined threadbare the probabilities of the entries of the accounts. He has given reasons why he does not accept, and we repeat that the order of rejection is not required to be expressed. Nowhere in Section 145 of the Act, it has been said that there should be express order of rejection. Upon reading of the entire findings and approach, if the mind of the Assessing Officer can be found that his mind is to reject the books of account, no express word is required to such rejection. The Assessing Officer has found that no material evidence was produced before him. It is unfortunate that the learned Commissioner of Income Tax (Appeals) has ignored the findings absolutely. The learned Tribunal has, in our view, correctly, on fact, upheld the order of the Assessing Officer, on this issue. Now, coming to the estimation of profit, the Tribunal, on fact, found that the estimation of profit is reasonable. We do not find any element of law to substitute our reasoning with the said reasoning of the Tribunal. We are of the view that the judgment of the Delhi High Court in Poonam Rani (supra), does not help in any manner in this case, as the issue involved here is whether the order of rejection is in accordance with law under Section 145 of the Act or not. On fact-finding, the learned Tribunal found that rejection of books of account is right, so also the estimation of profit. Under these circumstances, this Court cannot admit the appeal to decide any ground as no element of law is involved. The appeal is accordingly dismissed. There will be no order as to costs. ________________________ K.J. SENGUPTA, CJ ______________________ K.C. BHANU, J 19.9.2013 bnr [1] (2010) 326 ITR 223 (Delhi) [2] (2005) 13 SCC 307 "