Telelinks v. Commissioner Of Income Tax, Batninda

ITA No. 269 of 7201 a IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH ITA No. 269 of 2014.Date of Decision : 70.11.7014. TelelInks . Appellant Versus Commissioner of Income Tax, Batninda ...Respondent ANI ITA No. 2275 of 2014Date of Decision : 20.11.2014 The Commissioner of Income Tax-ll, Amritsar . Appellant Versus M/s The Mattewal Co-op. L/C Society, Amritsar ... Respondent Rajive Bhalla, [.(Oral) By way of this order, we snail dispose of ITA No. 269 of2014 titled as ‘Telelinks Vs. Commissioner of Income Tax,Batninda' ana ITA No. 2275 of 2014 titlea as 'Tne Commissioner oIncome Tax-ll, Amritsar Vs. M/s Tne Mattewal Co-op. L/C Society, ITA No. 269 of 7201 Amritsar. Before delimiting the substantial questions of law tnatarise for adjudication, it would be appropriate to briefly refer totne facts of eacn 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 bDullding contractor. Tne AssessingOfficer refused to accept the profit and loss account, leager, casnbook etc. and, therefore, applied a net profit rate of 12% byrelying upon a Jjuagment of this Court ICommissioner of IncomeTaxVS.Paronat Kumar,(2010)373ITR 6/75(P&H)and ajuagment by the Income Tax Appellate Tribunal inACIT|VS.M/sEss. Buildings—(P)Ltd.,Luaniana,(ITA No. 70/7/Cna./1997)Aggrieved by the assessment order, the assessee filed an appeal.The Commissioner of Income Tax (Appeals) (nereinafter referredto as tne ‘CIT(A)'), Bathinda reduced the net profit rate to 6%.The revenue filed an appeal before tne Income Tax AppellateTribunal (nere-in-after referred to as the ‘ITAT'). =JTne ITATaccepted tne appeal, set-aside the order passed by the CIT(A) andrestored the order passed by the Assessing Officer applying a netprofit rate of 12%. ITA No. 225 of 2014 The assessee in this case Is also a Dullding contractor.The Assessing Officer rejected the books of accounts and applieda net profit rate by 8%. Tne CIT(A), Amritsar vide order dated06.11.2012 reduced the net profit rate to 6%. Tne revenue filedan appeal whereas the assessee filed cross-obpjections. The ITATdismissed the appeal filed by the revenue but allowed the cross- ITA No. 269 of 7201 4 objections filed by the assessee and reduced the net profit rate to5.5%. | Counsel for the assessee and counsel for the revenuearead-/demthat the substantial questions of law that arise foradjudication are :- “(a) the nature ofpower exercised while determiningnet profit rate;net profit rate; <?=factors required to be taken into consideration while determining net profit rate; (Ccwhether net profit rate determined without assigning any reasons Is not perverse and|arbitrary?”arbitrary?” We have heard learned counsel for the parties,|considered precedents cited for and against and proceed toanswer 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 whileassessing their income. A perusal of the impugned orders revealsthat the Assessing Officer, the Commissioner of Income Tax andthe Income Tax Appellate Tribunal have applied differentpercentages of net profit. The ITAT and the CIT(A) have eitherreduced the rate or restored the rate applied by the AssessingOfficer. The first question relates to the nature of the powerexercised while determining a net profit rate. The question mustnecessarily be answered by holding that where books of accountsare rejected or not produced, the Assessing Officer would be wellwithin the limits of his jurisdiction to assess income by applying a ITA No. 269 of 7201 A The first question relates to the nature of the powerexercised while determining a net profit rate. The question mustnecessarily be answered by holding that where books of accountsare rejected or not produced, the Assessing Officer would be wellwithin the limits of his jurisdiction to assess income by applying a ITA No. 269 of 7201 A fictional net profit rate. Tne power so conferred Is quasi-judicialand, therefore, not unbridled as It must be guided by reason andtnough it may Involve a degree of guesswork, must be basedupon a rational analysis of facts. The first question of law Is|answered accordingly. The second question of law namely factors required tobe taken Into consideration wnile applying a net profit rate nascome up for consideration, as on the same set of facts theAssessing Officer, the Commissioner of Income Tax and IncomeTax Appellate Tribunal have applied different rates of net profit.The aiscretion to aetermine an adequate net profit rateundoubtedly vests witn authorities under the Act but theaiscretion so vested Is neither unbridled nor unguided as it mustbe guided by reason I.e. snould be preceded by reasons whicn, Inturn, snoula be preceded by a perceptible process of reasoningbased upon due consideration of all relevant facts. However,autnorities under tne Act appear to construe their jurisdiction as aaiscretion to apply a thumb rule dependent almost entirely upontne wnims of a particular Officer. The aiscretion to determine a net profit rate mustnecessarily be exercised on the basis of relevant factors whicn wesnail enumerate but before doing so, would clarify that thesefactors are neitner exnaustive nor a final word on relevant factorstnat may be considered while determining the net profit rate. Afew significant factors are the past tax history of the assessee, Ifavailable, assessment orders that may Nave been passed andaccepteaq by the department, tne nature of tne assessees' ITA No. 269 of 7201 5 business, an appraisal of the value of the contract, prevailingeconomic conaitions vis-a-vis the assessee’s business, the price ofraw matertal, labour etc. the rise In price Index as notified by theCentral Government from time to time If applicable and if theAssessing Officer proceeds to rely upon assessments of otherassessees engaged In similar business to ao so only afteragetermining points of similarity etc. At this stage, it would beappropriate to clarify that the word similar is not synonymouswith the word ‘identical’. Factors referred to above are merelyiiustrative and not exhaustive of the circumstances that may ormay not be taken into consideration. At this stage, it would beappropriate to reproduce a few words fromDnakeswar! Cotton Mills Lta.VS.CIT (1954) 26 ITR 775 (SC)sO as to place our conclusions in their correct perspective:- “ue tlhe ITO 1s not barred by technical rules ofevidence and pleadings, and he Is entitled to act onMaterial which may not be accepted as evidence in aCourt of law, but in making the assessment under sub-S.(3) of s. 23 the 1TO Is not entitled to make a pureguess and make an assessment without reference toany evidence or any material at all. There must besomething more than bare suspicion to support theassessment under S. 23(3). [In this case the Tribunalviolated certain fundamental rules of Justice inreaching its conclusions. Firstly, it did not disclose tothe assessee What information had been supplied to itby the Departmental Reoresentative. Next, if did notgive any opportunity to the company to rebut theMaternal furnished to it by him, and lastly, it declinedto take all the meterlfal that the assessee wanted tproduce in support of its case. The result is that theassessee had not had a fair hearing. The estimate of ITA No. 269 of 7201 ITA No. 269 of 7201 the gross rate of profit on sales, both by the [TO andthe Tribunal, seems to be based on surm!ses,suspicions and conjectures. [t 1s somewhat surprisingthat the Tribunal took from the reoresentative of theDepartment a statement of gross profit rates of othercotton mills without showing that statement to theassessee and without giving him an opportunity toShow that statement had no relevancy whatsoever tothe case of the mill in question. [ft 1s not knownwhether the mi/ls which had disclosed these rates wereSituate in Bengal or elsewhere, and whether thesemills were similarly situated and circumstanced. Notonly did the Triopunal not show the information giveby the reoresentative of the Department to theappellant, but it refused even to look at the trunk loadof books and papers produced before it by assessee.The 1TO and the Tribunal in estimating the gross profitrate on sales did not act on any material but acted onjoure guess and suspicion. The order of the Tribunawas set aside and the matter was remanded to it withagirections that in arriving at its estimate of grossprofits and sales it should give full opportunity to theassessee to place any relevant material on the pointthat it has before the Tribunal, whether it 1s found inthe Dooks of account or elsewhere and it shnou/ld aldisclose to the assessee the meterlal on which theTribunal Is going to found its estimate and then affordfim full opportunity to meet the substance of anyprivate inquiries made by the /TO if it is intended to|Make the estimate on tne foot of those enquiries." A relevant extract fromClT Central & Unitea Provineer Vs.Laxmi Narain Badre Dass (1937) 5 ITR_1/0 the Privy Council(Page 180)reads as follows :- "The officer 1s to make an .assessment to the bestiof his Judgment against a person who Is in default as ITA No. 269 of 7201 | regards supplying information. He must not actaishonestly, or vindictively or capriciously because hemust exercise judgment in the matter. He must makewhat he honestly believes to be a fair estimate of theproper figure of assessment, and for this puroose hemust, their Lordshio thinks, be able to take intoconsideration local knowledge and repute in regard tothe assessee's circumstances, and his own Knowledgeof previous returns by and assessments of theassessee, and all other matters which he thinks willassist him in arriving at a fair and proper estimate;though there must necessarily be guess work in theMatter, it must be honest guess work. In that sense,foo, the assessment must be to some extent arbitrary.Their Lordships think that the section places the officerIn the position of a person whose decision as toamount Is final and subject to no appeal, bust whosedecision If tt can pe snown to have peen arrived atwithout an honest exercise of judgment, may berevised or reviewed by the Commissioner under thepowers conferred upon that official by section 33." It would also be necessary to refer to anotherJjuagment iState of KeralaVS,C. Velukutty, 1966 ITR Vol. (LX)239,wherein while dealing with tne expression ‘best of nisjugdgment’, it nas been held that tne aiscretion to determine netprofit rate vests In the autnorities but discretion snali not bearbitrary and snould have a reasonable nexus to the availablematerial and the circumstances of the case, followed by reasonstnat appear to be legal and valid. A reference may also be madeto juagment of tnis Court InITA No. 478of JOOS titiedasAggarwal Engineering Co.Vs_|Assistant Commissioner of IncomeTax,decided on 06.12.2010. Tne second question of law Is ITA No. 269 of 7201 S answered accordingly. The third question of law reads as Tfollows: Gwhetner a net profit rate determined without assigning any reasons Is not perverse and arbitrary” The question need not detain us for long. Tne questionarises as the Assessing Officer and the Tribunal nave relied upon ITA No. 269 of 7201 S answered accordingly. The third question of law reads as Tfollows: Gwhetner a net profit rate determined without assigning any reasons Is not perverse and arbitrary” The question need not detain us for long. Tne questionarises as the Assessing Officer and the Tribunal nave relied upon Paronat Kumar7S case (Supra)to hold tnat the net profit rate onceaetermined Is a question of fact and, tnerefore, does not call forInterference. A Judgment Is a binding precedent where an opinionIs recorded on a question of law. Tne authorities under the Actapparently misread the above judgment and ignored that wniledismissing tne appeal filead by the revenue, it was held thatapplying net profit rate on the basis of best jJuagment assessmen‘In a given situation’ will be a question of fact unless suchassessment Is snown to be arbitrary or perverse, thereby clearlysetting out tnat if tne net profit rate Is not perverse andarbitrarily, it snail only be a question of fact. Tne juagment, In ourconsidered opinion, therefore, cannot be read as a precedent for aconciusion that In eacn and every case of a contractor, theAssessing Officer would be legally obliged to apply a net profitrate of 12%de Nors, tne facts of the case and even wnere tne netprofit rate discloses an arbitrary and perverse consideration, itwould be a question of fact. A perusal of the judgment revealstnat the net profit rate of 12% was affirmed as counsel for therevenue was unabie to point out any perversity or arbitraryconsideration in the exercise of discretion. Tne third question oflaw Is, therefore, answered by nolding that If consideration ITA No. 269 of 7201 8 leading to a net profit rate Is perverse and or arbitrary, tne findingso rendered Snail be Illegal and snall not be a question of fact. | The questions of law having been answered, we naveno hesitation in allowing the appeal as the Impugned orderssetting out alifferent rates of net profit are devoid of any rationareasons mucn !/ess a perceptible process of reasoning by referrinto relevant facts. Consequently, orders passed by the Assessing Officer,tne CIT(A) and the Income Tax Appellate Tridbuna!l are set asiand tne matters are restored to the Assessing Officer concernedto re-adetermine the net profit rate by reference to and after quconsideration of relevant factors narrated nere-iIn-before and sucother factors aS may be deemed relevant. Any objection as tolimitation in finalising tne assessment shall not pronibit theAssessing Officer from proceeding to finalise assessmentproceedings. Parties are directed to appear before the AssessingOfficer on 12.0L.20L5. (RAJIVE BHALLA)JUDGE| November 20, 2014.kKanchnan | (B.S. WALIA)JUDGE|