THE COMMISSIONER OF INCOME-TAX V. DULLA RAM

ITA/122/1999

AI Insights

The case revolves around an appeal by the Commissioner of Income Tax, Patiala, challenging the order of the Income Tax Appellate Tribunal, which had upheld the decision of the Commissioner of Income Tax (Appeals), Bathinda. The primary issue was whether the Assessing Officer could make additions to the income of Dulla Ram, a labour contractor, based on unexplained entries in the books of accounts after rejecting those books and applying a flat rate of profit. The Tribunal and the lower appellate authority both found that once the books were rejected, no entries therein could be used for making further additions under Section 68 of the Income Tax Act, 1961.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 730503 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 22-10-2013
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Versus G.K.Contractor (2009) 19 DTR (Raj) 305
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: ALOK MITTAL
• Assessee Lawyers: SAVITA SAXENA
• Keywords: Assessment; Income Tax; Rejection of Books; Unexplained credit entry; Flat Rate Assessment
• Section: 68; 260A

Judgement Text

"I.T.A. No.122 of 1999 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH I.T.A. No.122 of 1999. Decided on:-October 22, 2013. The Commissioner of Income Tax, Patiala. .........Appellant. Versus Dulla Ram, Labour Contractor, Kotkapura. .........Respondent. CORAM: Hon'ble Mr. Justice Rajive Bhalla Hon'ble Mr. Justice Dr. Bharat Bhushan Parsoon. ***** Present:- Ms. Savita Saxena, Advocate for the appellant. Mr. Alok Mittal, Advocate for the respondent. Rajive Bhalla, J (Oral) The revenue has filed an appeal, under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as, the Act) to challenge order dated 28.4.1999 passed by the Income Tax Appellate Tribunal (for short, the Tribunal), Amritsar Bench, Amritsar, whereby order dated 14.3.1990 passed by the Commissioner of Income Tax (Appeals), Bhatinda setting aside the assessment order, has been affirmed. Yag Dutt 2013.11.13 13:54 I attest to the accuracy and integrity of this document I.T.A. No.122 of 1999 -2- The revenue has framed the following questions of law: “(i) Whether on the facts and in the circumstances of the case, the ITAT was right in law in sustaining the order of the CIT(A) vide which the CIT(A) deleted the addition of Rs.1,98,295/- so made by the Assessing Officer under Section 68? (ii) Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that where flat rate for assessment is adopted after rejecting books of accounts, ITO cannot make addition on account of unexplained credit entry in books of the assessee as undisclosed income from other sources?” A perusal of the questions of law would reveal that in essence the only substantial question of law that arises is, “Whether after rejection of books of accounts, an Assessing Officer can make any further addition on account of unexplained entries treating them as undisclosed income from other sources by invoking Section 68 of the Act?” The assessee is a labour contractor. The Assessing Officer completed assessment at a total income of Rs.2,70,992/- after rejecting the account books and applying a flat rate of 10%. The Assessing Officer also added Rs.1,98,298/- to the income of the assessee by relying upon alleged unexplained entries reflected in the books of accounts. Aggrieved by this order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Bathinda, who partly allowed the appeal by holding that as account books have been rejected, entries therein cannot be relied for Yag Dutt 2013.11.13 13:54 I attest to the accuracy and integrity of this document I.T.A. No.122 of 1999 -3- addition to income. However, after holding as above, the Commissioner of Income Tax (Appeals) enhanced the flat rate from 10% to 12.5%. The revenue filed an appeal whereas the respondent filed cross- objections before the Tribunal. Vide the impugned order, the Tribunal has dismissed the appeal filed by the revenue and accepted the cross-objections filed by the assessee by holding as follows: “9. As far as ground taken by the assessee in his cross objection regarding the application of rate of 12.5% by the CIT(A) against the rate of 10% applied by the A.O. concerned, in our opinion, looking into the facts that the assessee is a Labour Contractor, the CIT(A) was not fair and reasonable to apply the G.P. rate of 12.5% against the rate of 10% applied by the A.O., which was also agreed by the assessee. The D.R. has also conceded that it would be very fair and reasonable to apply the net profit rate of 10% in the case of the assessee. 10. In view of the above discussion, the ground of the assessee taken in the C.O. as well as the C.O. of the assessee succeeds and hence it is concluded that it is fair and reasonable to apply a net rate of 10% in the case of the assessee while calculating the profits. x x x 13. After going through the order of the CIT(A), we are of the considered opinion that the order of the CIT(A) does not suffer from any illegality or infirmity regarding his conclusion that the deposits as well as withdrawals of contract receipts have not been properly reflected in the books of accounts and as such no reliance can be placed on this bank account. 14. In view of our above discussion, we are of the considered opinion that the CIT(A) was fully justified in deleting the Yag Dutt 2013.11.13 13:54 I attest to the accuracy and integrity of this document I.T.A. No.122 of 1999 -4- addition of Rs.1,98,298/- made by the A.O. Accordingly, the ground of appeal taken by the Revenue is hereby rejected. 15. In the result, the appeal of the Revenue, i.e. I.T.A. No.733(ASR)/1990 fails and the same is dismissed. However, Cross-Objection of the assessee i.e. C.O. No.83 (ASR)/1990 succeeds and the same is allowed.” A perusal of the above extract reveals that the Tribunal has affirmed the order passed by the Commissioner of Income Tax (Appeals) by holding that as account books were rejected in their entirety, entries in account books could not be relied for making additions to income. The Tribunal, however, restored the gross profit rate of 10% applied by the Assessing Officer. Counsel for the revenue submits by reference to Section 68 of the Act, that even if account books are rejected, an Assessing Officer may, where any unexplained entry appears in the account books, add the amount reflected in the entry to the income of an assessee. The mere fact that account books have been rejected in their entirety or in part cannot be construed to limit the operation of Section 68 of the Act. It is further submitted that Section 68 of the Act is a general provision applicable in all situations whether account books have or have not been rejected. The impugned orders having been passed by ignoring Section 68 of the Act, are illegal and may, therefore, be set aside. Counsel for the assessee, per contra, submits that Section 68 of the Act applies to situations where account books have not been rejected and Yag Dutt 2013.11.13 13:54 I attest to the accuracy and integrity of this document I.T.A. No.122 of 1999 -5- no credible explanation is offered by the assessee for suspicious entries. The Assessing Officer having rejected account books and calculated income on an estimated rate of profit, no additions could be made on account of unexplained entries in the account books. In support of his contentions, counsel for the assessee relies upon Commissioner of Income Tax Versus G.K.Contractor (2009) 19 DTR (Raj) 305. We have heard counsel for the parties, perused the impugned orders and are of the firm opinion that there is no illegality or infirmity in the findings recorded by the Tribunal. An Assessing Officer may, while considering a return of income, inspect the account books and, if satisfied, that account books do not reflect the true income of an assessee, reject the same. Account books once rejected, are ruled out of consideration and cannot be pressed into service whether by the assessee or the revenue. Thus, when account books are rejected, it would follow, as a necessary corrolary, that entries in the account books whether suspicious or not cannot be relied by the revenue or the assessee. To hold otherwise, would, in essence, render account books valid for certain purposes and invalid for others, a course impermissible in law. The Assessing Officer rejected the account books in their entirety and thereafter proceeded to assess income by applying a flat rate of profit of 10%. After applying a flat rate of profit of 10%, the Assessing Officer added Rs.1,98,298/- to the income of the assessee on the basis of certain 'entries' deemed to be suspicious. The Commissioner of Income Tax (Appeals) as Yag Dutt 2013.11.13 13:54 I attest to the accuracy and integrity of this document I.T.A. No.122 of 1999 -6- well as the Tribunal have rightly held that as books of accounts were rejected in their entirety, the Assessing Officer could not rely upon any entry in the books of accounts for making an addition of Rs.1,98,298/-. A bare reading of Section 68 of the Act would reveal that it would not apply to a situation where account books have not been rejected. We find no reason to differ from the opinion recorded by the Tribunal and, therefore, answer the questions of law against the revenue and in favour of the assessee. The appeal is, consequently, dismissed. (Rajive Bhalla) Judge (Dr. Bharat Bhushan Parsoon) Judge October 22, 2013 'Yag Dutt' Yag Dutt 2013.11.13 13:54 I attest to the accuracy and integrity of this document "