Telelinks and The Mattewal Co-op. L/C Society, Amritsar V. Commissioner of Income Tax, Bathinda and Commissioner of Income Tax-II, Amritsar

ITA/269/2014

AI Insights

The case involves two appeals, ITA No. 269 of 2014 and ITA No. 225 of 2014, which were heard together by the High Court of Punjab and Haryana. Both cases pertain to building contractors whose books of accounts were rejected by the Assessing Officers, leading to the application of different net profit rates for tax assessment. The main legal issues revolved around the nature of the power exercised by tax authorities in determining net profit rates, the factors to be considered in such determinations, and the legality of net profit rates set without adequate reasoning. The court found that the authorities had not applied a consistent or reasoned approach in setting these rates, leading to the decision to remand the cases for re-assessment.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 794451 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 20-11-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Vs. Parbhat Kumar, ACIT Vs. M/s Ess. Buildings (P) Ltd., Dhakeswari Cotton Mills Ltd. Vs. CIT, CIT Central & United Provinces Vs. Laxmi Narain Badre Dass, Aggarwal Engineering Co. Vs. Assistant Commissioner of Income Tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: DENESH GOYAL
• Assessee Lawyers: PANKAJ JAIN; DIVYA SURI; SACHIN BHARDWAJ
• Keywords: Assessment Order; Best Judgment Assessment; Income Tax; Net profit rate; Quasi-judicial power
• Section: 323 ITR 675 (P&H); ITA No. 707/Chd./1997

Judgement Text

"ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 1 IN THE HIGH COURT OF PUNJAB AND HARYANA IN THE HIGH COURT OF PUNJAB AND HARYANA IN THE HIGH COURT OF PUNJAB AND HARYANA IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH AT CHANDIGARH AT CHANDIGARH AT CHANDIGARH ITA No. 269 of 2014. ITA No. 269 of 2014. ITA No. 269 of 2014. ITA No. 269 of 2014. Date of Decision : 20.11.2014. Date of Decision : 20.11.2014. Date of Decision : 20.11.2014. Date of Decision : 20.11.2014. Telelinks Telelinks Telelinks Telelinks ...Appellant ...Appellant ...Appellant ...Appellant Versus Versus Versus Versus Commissioner of Income Tax, Bathinda Commissioner of Income Tax, Bathinda Commissioner of Income Tax, Bathinda Commissioner of Income Tax, Bathinda ...Respondent ...Respondent ...Respondent ...Respondent AND AND AND AND ITA No. 225 of 2014. ITA No. 225 of 2014. ITA No. 225 of 2014. ITA No. 225 of 2014. Date of Decision : 20.11.2014 Date of Decision : 20.11.2014 Date of Decision : 20.11.2014 Date of Decision : 20.11.2014 The Commissioner of Income Tax-II, Amritsar The Commissioner of Income Tax-II, Amritsar The Commissioner of Income Tax-II, Amritsar The Commissioner of Income Tax-II, Amritsar ...Appellant ...Appellant ...Appellant ...Appellant Versus Versus Versus Versus M/s The Mattewal Co-op. L/C Society, Amritsar M/s The Mattewal Co-op. L/C Society, Amritsar M/s The Mattewal Co-op. L/C Society, Amritsar M/s The Mattewal Co-op. L/C Society, Amritsar ...Respondent ...Respondent ...Respondent ...Respondent CORAM: CORAM: CORAM: CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE B.S. WALIA HON'BLE MR. JUSTICE B.S. WALIA HON'BLE MR. JUSTICE B.S. WALIA HON'BLE MR. JUSTICE B.S. WALIA Present: Mr. Pankaj Jain, Senior Advocate with Mr. Divya Suri, Advocate and Mr. Sachin Bhardwaj, Advocate for the appellant. Mr. Denesh Goyal, Advocate for the respondent. *** Rajive Bhalla, J.(Oral) Rajive Bhalla, J.(Oral) Rajive Bhalla, J.(Oral) Rajive Bhalla, J.(Oral) By way of this order, we shall dispose of ITA No. 269 of 2014 titled as 'Telelinks Vs. Commissioner of Income Tax, Bathinda' and ITA No. 225 of 2014 titled as 'The Commissioner of Income Tax-II, Amritsar Vs. M/s The Mattewal Co-op. L/C Society, KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 2 Amritsar. Before delimiting the substantial questions of law that arise for adjudication, it would be appropriate to briefly refer to the facts of each case. ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 The assessee is a building contractor. The Assessing Officer refused to accept the profit and loss account, ledger, cash book etc. and, therefore, applied a net profit rate of 12% by relying upon a judgment of this Court in Commissioner of Income Commissioner of Income Commissioner of Income Commissioner of Income Tax Tax Tax Tax Vs. Vs. Vs. Vs. Parbhat Kumar Parbhat Kumar Parbhat Kumar Parbhat Kumar, , , , (2010) 323 ITR 675 (P&H) (2010) 323 ITR 675 (P&H) (2010) 323 ITR 675 (P&H) (2010) 323 ITR 675 (P&H) and a judgment by the Income Tax Appellate Tribunal in ACIT ACIT ACIT ACIT Vs. Vs. Vs. Vs. M/s M/s M/s M/s Ess. Buildings (P) Ltd., Ludhiana, (ITA No. 707/Chd./1997) Ess. Buildings (P) Ltd., Ludhiana, (ITA No. 707/Chd./1997) Ess. Buildings (P) Ltd., Ludhiana, (ITA No. 707/Chd./1997) Ess. Buildings (P) Ltd., Ludhiana, (ITA No. 707/Chd./1997). . . . Aggrieved by the assessment order, the assessee filed an appeal. The Commissioner of Income Tax (Appeals) (hereinafter referred to as the 'CIT(A)'), Bathinda reduced the net profit rate to 6%. The revenue filed an appeal before the Income Tax Appellate Tribunal (here-in-after referred to as the 'ITAT'). The ITAT accepted the appeal, set-aside the order passed by the CIT(A) and restored the order passed by the Assessing Officer applying a net profit rate of 12%. ITA No. 225 of 2014 ITA No. 225 of 2014 ITA No. 225 of 2014 ITA No. 225 of 2014 The assessee in this case is also a building contractor. The Assessing Officer rejected the books of accounts and applied a net profit rate by 8%. The CIT(A), Amritsar vide order dated 06.11.2012 reduced the net profit rate to 6%. The revenue filed an appeal whereas the assessee filed cross-objections. The ITAT dismissed the appeal filed by the revenue but allowed the cross- KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 3 objections filed by the assessee and reduced the net profit rate to 5.5%. Counsel for the assessee and counsel for the revenue are ad-idem that the substantial questions of law that arise for adjudication are :- “(a) the nature of power exercised while determining net profit rate; (b) factors required to be taken into consideration while determining net profit rate; (c) whether net profit rate determined without assigning any reasons is not perverse and arbitrary?” We have heard learned counsel for the parties, considered precedents cited for and against and proceed to answer the questions. The assessees in both cases are building contractors, whose account books were rejected for one reason or the other. The Assessing Officer, therefore, applied a net profit rate while assessing their income. A perusal of the impugned orders reveals that the Assessing Officer, the Commissioner of Income Tax and the Income Tax Appellate Tribunal have applied different percentages of net profit. The ITAT and the CIT(A) have either reduced the rate or restored the rate applied by the Assessing Officer. The first question relates to the nature of the power exercised while determining a net profit rate. The question must necessarily be answered by holding that where books of accounts are rejected or not produced, the Assessing Officer would be well within the limits of his jurisdiction to assess income by applying a KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 4 fictional net profit rate. The power so conferred is quasi-judicial and, therefore, not unbridled as it must be guided by reason and though it may involve a degree of guesswork, must be based upon a rational analysis of facts. The first question of law is answered accordingly. The second question of law namely factors required to be taken into consideration while applying a net profit rate has come up for consideration, as on the same set of facts the Assessing Officer, the Commissioner of Income Tax and Income Tax Appellate Tribunal have applied different rates of net profit. The discretion to determine an adequate net profit rate undoubtedly vests with authorities under the Act but the discretion so vested is neither unbridled nor unguided as it must be guided by reason i.e. should be preceded by reasons which, in turn, should be preceded by a perceptible process of reasoning based upon due consideration of all relevant facts. However, authorities under the Act appear to construe their jurisdiction as a discretion to apply a thumb rule dependent almost entirely upon the whims of a particular Officer. The discretion to determine a net profit rate must necessarily be exercised on the basis of relevant factors which we shall enumerate but before doing so, would clarify that these factors are neither exhaustive nor a final word on relevant factors that may be considered while determining the net profit rate. A few significant factors are the past tax history of the assessee, if available, assessment orders that may have been passed and accepted by the department, the nature of the assessees' KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 5 business, an appraisal of the value of the contract, prevailing economic conditions vis-a-vis the assessee's business, the price of raw material, labour etc. the rise in price index as notified by the Central Government from time to time if applicable and if the Assessing Officer proceeds to rely upon assessments of other assessees engaged in similar business to do so only after determining points of similarity etc. At this stage, it would be appropriate to clarify that the word similar is not synonymous with the word 'identical'. Factors referred to above are merely illustrative and not exhaustive of the circumstances that may or may not be taken into consideration. At this stage, it would be appropriate to reproduce a few words from Dhakeswari Cotton Dhakeswari Cotton Dhakeswari Cotton Dhakeswari Cotton Mills Ltd. Mills Ltd. Mills Ltd. Mills Ltd. Vs. Vs. Vs. Vs. CIT (1954) 26 ITR 775 (SC) CIT (1954) 26 ITR 775 (SC) CIT (1954) 26 ITR 775 (SC) CIT (1954) 26 ITR 775 (SC) so as to place our conclusions in their correct perspective:- “.....The ITO is not barred by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a Court of law, but in making the assessment under sub- s.(3) of s. 23 the ITO is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under S. 23(3). In this case the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the Departmental Representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing. The estimate of KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 6 the gross rate of profit on sales, both by the ITO and the Tribunal, seems to be based on surmises, suspicions and conjectures. It is somewhat surprising that the Tribunal took from the representative of the Department a statement of gross profit rates of other cotton mills without showing that statement to the assessee and without giving him an opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It is not known whether the mills which had disclosed these rates were situate in Bengal or elsewhere, and whether these mills were similarly situated and circumstanced. Not only did the Tribunal not show the information given by the representative of the Department to the appellant, but it refused even to look at the trunk load of books and papers produced before it by assessee. The ITO and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. The order of the Tribunal was set aside and the matter was remanded to it with directions that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the ITO if it is intended to make the estimate on the foot of those enquiries.\" A relevant extract from CIT Central & United Provineer CIT Central & United Provineer CIT Central & United Provineer CIT Central & United Provineer Vs. Vs. Vs. Vs. Laxmi Narain Badre Dass (1937) 5 ITR 170 the Privy Council Laxmi Narain Badre Dass (1937) 5 ITR 170 the Privy Council Laxmi Narain Badre Dass (1937) 5 ITR 170 the Privy Council Laxmi Narain Badre Dass (1937) 5 ITR 170 the Privy Council (Page 180) (Page 180) (Page 180) (Page 180) reads as follows :- reads as follows :- reads as follows :- reads as follows :- \" .....The officer is to make an .assessment to the best of his judgment against a person who is in default as KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 7 regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordship thinks, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; though there must necessarily be guess work in the matter, it must be honest guess work. In that sense, too, the assessment must be to some extent arbitrary. Their Lordships think that the section places the officer in the position of a person whose decision as to amount is final and subject to no appeal, bust whose decision if it can be shown to have been arrived at without an honest exercise of judgment, may be revised or reviewed by the Commissioner under the powers conferred upon that official by section 33.\" It would also be necessary to refer to another judgment in State of Kerala State of Kerala State of Kerala State of Kerala Vs. Vs. Vs. Vs. C. Velukutty, 1966 ITR Vol. (LX) C. Velukutty, 1966 ITR Vol. (LX) C. Velukutty, 1966 ITR Vol. (LX) C. Velukutty, 1966 ITR Vol. (LX) 239, 239, 239, 239, wherein while dealing with the expression 'best of his judgment', it has been held that the discretion to determine net profit rate vests in the authorities but discretion shall not be arbitrary and should have a reasonable nexus to the available material and the circumstances of the case, followed by reasons that appear to be legal and valid. A reference may also be made to judgment of this Court in ITA No. 478 of 2006 titled as ITA No. 478 of 2006 titled as ITA No. 478 of 2006 titled as ITA No. 478 of 2006 titled as Aggarwal Engineering Co. Aggarwal Engineering Co. Aggarwal Engineering Co. Aggarwal Engineering Co. Vs. Vs. Vs. Vs. Assistant Commissioner of Income Assistant Commissioner of Income Assistant Commissioner of Income Assistant Commissioner of Income Tax, Tax, Tax, Tax, decided on 06.12.2010. The second question of law is KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 8 answered accordingly. The third question of law reads as follows:- “whether a net profit rate determined without assigning any reasons is not perverse and arbitrary” The question need not detain us for long. The question arises as the Assessing Officer and the Tribunal have relied upon Parbhat Kumar's case (supra) Parbhat Kumar's case (supra) Parbhat Kumar's case (supra) Parbhat Kumar's case (supra) to hold that the net profit rate once determined is a question of fact and, therefore, does not call for interference. A judgment is a binding precedent where an opinion is recorded on a question of law. The authorities under the Act apparently misread the above judgment and ignored that while dismissing the appeal filed by the revenue, it was held that applying net profit rate on the basis of best judgment assessment 'in a given situation' will be a question of fact unless such assessment is shown to be arbitrary or perverse, thereby clearly setting out that if the net profit rate is not perverse and arbitrarily, it shall only be a question of fact. The judgment, in our considered opinion, therefore, cannot be read as a precedent for a conclusion that in each and every case of a contractor, the Assessing Officer would be legally obliged to apply a net profit rate of 12% de hors, the facts of the case and even where the net profit rate discloses an arbitrary and perverse consideration, it would be a question of fact. A perusal of the judgment reveals that the net profit rate of 12% was affirmed as counsel for the revenue was unable to point out any perversity or arbitrary consideration in the exercise of discretion. The third question of law is, therefore, answered by holding that if consideration KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 ITA No. 269 of 2014 9 leading to a net profit rate is perverse and or arbitrary, the finding so rendered shall be illegal and shall not be a question of fact. The questions of law having been answered, we have no hesitation in allowing the appeal as the impugned orders setting out different rates of net profit are devoid of any rational reasons much less a perceptible process of reasoning by referring to relevant facts. Consequently, orders passed by the Assessing Officer, the CIT(A) and the Income Tax Appellate Tribunal are set aside and the matters are restored to the Assessing Officer concerned to re-determine the net profit rate by reference to and after due consideration of relevant factors narrated here-in-before and such other factors as may be deemed relevant. Any objection as to limitation in finalising the assessment shall not prohibit the Assessing Officer from proceeding to finalise assessment proceedings. Parties are directed to appear before the Assessing Officer on 12.01.2015. (RAJIVE BHALLA) (RAJIVE BHALLA) (RAJIVE BHALLA) (RAJIVE BHALLA) JUDGE JUDGE JUDGE JUDGE (B.S. WALIA) (B.S. WALIA) (B.S. WALIA) (B.S. WALIA) JUDGE JUDGE JUDGE JUDGE November 20, 2014. November 20, 2014. November 20, 2014. November 20, 2014. kanchan KANCHAN 2014.12.11 15:06 I attest to the accuracy and authenticity of this document Chandigarh "