Income Tax Appellate Tribunal - Agra
Das'S Friends Builders (P) Ltd . vs Dy. Cit on 27 March, 2002
Equivalent citations: (2004)88TTJ(AGRA)651
ORDER
Keshaw Prasad, A.M. The cross-appeals directed by the revenue as well as by the assessee arise out of the Commissioner (Appeals)'s order dated 8-6-2000, pertaining to assessment year 1997-98. For the sake of convenience, we will first take up the appeal directed by the revenue.
2. Grounds No. 1 to 3 raised by the revenue relate to the deletion of the addition of Rs. 81,69,717 made by assessing officer under section 69 of the Act on account of unexplained investment in the property constructed for sale.
2.1 Briefly, the facts of the case are that the assessee is a company, who acts as builder and also as contractor. During the year, the assessee was constructing two projects, namely, Friends Apartments (45 flats) and Friends Palace (30 flats). Besides constructions of these apartments, the assessee-company has also done civil constructions work for three parties on contract basis on which the receipts of Rs. 12,83,350 have been declared.
2.2 At the time of assessment proceedings, when the assessee produced various books of account, the assessing officer noted there was an alleged stock register, which was freshly written. This was written by the accountant at the division office and not at the site. He also noted that no separate stock registers for different projects were maintained. As per entries in the alleged stock register, the material for construction has been issued, but no receipts, etc. have been maintained for issuing the same. For which project, the material was issued is also not known. The assessing officer, therefore, recorded the statement of Shri Rajesh Saxena, the accountant of the assessee, who makes entries in the books of account. In his statement Shri Saxena admitted that the entries in the stock register were made on the basis of information given by Mistri. However, Shri Saxena was not able to pint point the name of the Mistri, who used to give that information. The assessing officer also observed that when the materials were issued, no voucher in token of the issue of material, was maintained. Besides above, the accountant also stated the entries in the cash book and the stock register have been made on the same date. But as the entries were in different ink colour, the assessing officer felt that once the entries have been made on the same date, the use of two different pens for making entries did not arise. He, therefore, felt that the proper consumption of material in each project cannot be worked out.
2.3 The assessing officer, therefore, felt that the opinion of the DVO may be obtained and accordingly a commission under section 131(1)(d) was issued to DVO for determining the investments in both the apartments separately. In view of commission under section 131(1)(d) of the Act, the DVO, vide notice dated 16-11-1999, asked the assessee to furnish certain informations. As the copy of this letter was also endorsed to the assessing officer, he also asked the assessee to make compliance with the notice issued by DVO. However, the assessee vide letter on 30-12-1999, informed the assessing officer that it has replied to the notices of the DVO and as the flats (investment for which was to be investigated) have already been sold and the assessee was no longer owner of the building, necessary information may be obtained from the flat owners. However, the assessing officer did not find any merit in the submissions of the assessee.
2.4 The DVO made inspection of the apartment on 9-12-1999. No representative of the assessee was present at the time of inspection. The DVO submitted his report dated 25-2-2000, determining the cost of investment in Friends Apartments at Rs. 4,21,57,000 during financial years 1994-95 to 1997-98. For Friends Palace, the cost has been estimated by financial DVO at Rs. 2,02,26,500 during financial years 1996-97 and 1997-98. The assessing officer also noted that the assessee has declared the investment in Friends Apartments at Rs. 74,34,507 (subsequently taken by the assessing officer at Rs. 1,34,79,635 and in Friends Palace at Rs. 26,62,384).
2.5 The assessing officer vide letter dated 14-3-2000, forwarded the copy of the DVO's report to the assessee and show-caused as to why the addition of the differential amount may not be made to the income of the assessee under section 69 of the Act. He also informed the assessee that as the stock register was freshly written, no stock register or work-in-progress register has been maintained in regular course of business, why the books of account maintained by the assessee, may not be rejected under section 145(3) and profit @ 10 per cent may not be applied. The assessee made his written submissions vide letter dated 21-3-2000. However, the reply dated 21-3-2000, was not found to be satisfactory by the assessing officer. On this date, the assessing officer asked the assessee to furnish the details of investments made during financial year 1999-2000 also. However, the assessee stated that the details of investments made by it during financial year 1999-2000 were not available at present.
2.6 The assessing officer, therefore, rejected the books of account under section 145(3) of the Act mainly due to the following defects :
(1) Proper stock register and work-in-progress register was not maintained;
(2) No separate particulars of expenses are maintained for each project;
(3) Some of the purchases made in cash, are not verifiable.
2.7 He accordingly held that the assessment of the assessee has to be made as per the provisions of section 144 of the Act. He, therefore, held that :
(1) On the contract receipts of Rs. 12,83,350, 8 per cent net profit-rate will be applied;
(2) The pro rata undisclosed investment in Friends Apartments during the relevant assessment year comes to Rs. 81,69,717, which is added to the total income of the assessee;
(3) In respect of undisclosed investment in the Friends Apartments in other years, proper action will be taken under section 148 of the Act;
(4) As the Friends Palace was still incomplete, its cost of construction will be considered in the year in which the said project was completed.
2.8 Aggrieved by the order passed by the assessing officer, appeal was filed. Before Commissioner (Appeals) it was argued that the DVO has no powers to issue notice under section 131 and, therefore, calling information from the assessee by issue of such notice was illegal. It was stated that even the assessee challenged the powers of issue of notice under section 131 before the DVO also vide letter dated 21-11-1999. But the DVO chose not to respond. Instead, he issued another reminder dated 30-11-1999, asking for various documents. The assessee again objected to it vide letter dated 4-12-1999. It was argued that the DVO has inspected the property without any prior information to the assessee. This was the reason why no representative of the assessee was deputed at the site on the date of inspection. It was stated that on receipt of DVO's report from the assessing officer, the assessee also made a request to the assessing officer to allow the cross-examination of the DVO in connection with the report and the basis on which the cost of construction has been estimated. However, the assessing officer refused to allow cross-examination of the DVO. It was also stated that the assessing officer on 21-3-2000, asked for the information regarding investment made during financial year 1999-2000. As the financial year 1999-2000 was yet to expire on 31-3-2000, it was impossible for the asse8see to give information called for by the assessing officer. It was also argued that refusal to allow cross-examination of the DVO was denial of the natural justice and on this basis itself, the assessing officer's order is vitiated. Reliance was placed on the decision of Hon'ble Allahabad High Court reported in 49 ITR 461 (sic). Even on merits, the assessee challenged the valuation report before the Commissioner (Appeals) on the grounds, which are mentioned by the Commissioner (Appeals) in para 2.3 of her order.
The main submissions made by the assessee in writing are summarised as under :
(1) As the properties were stock-in-trade, these have to be valued as per recognised principle mentioned in section 145A, which was procedural in nature and also as per accounting standards notified under section 145 of the Act, which became applicable from 1-4-1997.
(2) There was no basis with the assessing officer for making reference to the DVO to estimate the cost of construction.
(3) The property, namely, Friends Apartments was under construction as on 31-3-1997, and even on 9-12-1999, i.e. the date of alleged visit by DVO. Though the DVO has estimated the cost of construction in respect of Friends Palace also, the assessing officer did not make any addition on account of undisclosed investment in that building on the ground that the same was under construction, but rejecting the same claim in respect of Friends Apartments was whimsical.
(4) Bifurcation of the investment in each year on pro rata basis was imaginary as in some year, there may be substantial investment whereas in some year, it can be only nominal.
(5) The difference in estimating of cost on main items (cost incurred by the assessee vis-a-vis cost estimated by DVO) was as under :
Item DVO rate/cost Actual/rate/cost In Priends Apartments Lifts Rs. 13.68 lacs each Rs. 5.75 lacs each (contract filed) Marble Stone Rs. 335 per sq. m. plus cost of laying Rs. 181 per sq. m.
Green Marble Stone Rs. 507 per sq. m. plus cost of laying Rs. 150 per sq. m. (bills filed) Kota Marble Stone Rs. 132 per sq. m. plus cost of laying Rs. 66 per sq. m. (bills filed) In Friends Palace Submersible Pumps Rs. 40,000 Rs. 13,092 Compound Glazed Tiles Rs. 474 per sq. m.
Rs. 249 per sq. m.
(6) DVO has valued the cost of construction in another building, namely, M/s Anand Vrindavan (which was constructed during the same period being an eight storied building). In this building, the cost of construction adopted by the valuation officer was as under :
RCC framed structure :
Rs.
for a height of 10' 6"
2,677 per sq. m.
- do -
11' 3"
2,837 per sq. m.
Second to Sixth floor 10' 6"
3,401 per sq. m.
Eighth floor 13' 6"
3,604 per sq. m.
Servant room 9' 6"
2,327per sq. m.
Cost of Marble flooring 185per sq. m.
Kota Stone flooring 72per sq. m.
Ceramic Tiles 81per sq. m.
Cost of 2 lifts 11,09,000per sq. m.
But against the above estimates the DVO has adopted the following rates in the case of the assessee (Friends Apartments) though constructed during the same period :
P.A. rates for basement 6,145 per sq. m.
P.A. rates for height metre (ground to 4 stores)
3.05 5,768 per sq. m.
Chowkidar room height meter 3.05 3,518 per sq. m.
Ceramic Tiles 474.27 per sq. m.
Marble flooring 335 per sq. m.
507 per sq. m.
Kota Stone Flooring 132 per sq. m.
Cost of 2 lifts 27,36,000 per sq. m.
(7) When the assessee furnished the cost of construction met by it and the assessing officer was not satisfied with it, he could have asked the assessee to furnish report of the approved valuer in respect of Friends Apartments, but the same was not done.
(8) Since assessee was carrying on construction in course of business, and building was not constructed as capital investment, expenses would be debited in P&L a/c and as such even if assessee incurred expenditure in excess of amounts recorded in books and such excess expenditure was treated as assessee's income under section 69C, same amount would have to be debited in P&L a/c and addition under section 69C would be neutralised and net result would be 'nil' addition.
Reliance was placed on the decision of Bombay Bench of the Tribunal in the case of Nisant Hosing Development (P) Ltd. v. Asstt. CIT (1995) 52 ITD 103 (Patna).
(9) The business assets (stock- in-trade) cannot be termed as investments. The nature of investments as contemplated under sections 69, 69A and 69B refer to bullion, jewellery, money or valuable articles, and not to stock-in-trade, for the very simple reason that the stock-in-trade can be determined from the books of account and other records and it cannot be said that such investments are found unrecorded in the books.
(10) The assessing officer while invoking the provisions of section 69, has not discharged his burden of proof, while making the addition. It is a settled law that even if the assessee's explanation is rejected, it is for the assessing officer to establish that the incomes have actually accrued/investments have been made before invoking these deeming provisions. For making the addition under section 69, the onus rests with the department which has not been discharged and as such, the addition is illegal. Cases relied on were (a) J.S. Parkar v. VV Palekar (1974) 94 ITR 616 (Bom (b) CIT v. Daya Chand Jain (1975) 98 ITR 280 (All), (c) Brijlal Rupchand v. Income Tax Officer (1975) 40 TTJ (Ind) 668; (d) Rajpal Singh v. ITO (1991) 39 TTJ (Del) 544; and (e) R.K. Syal v. Asstt. CIT (2000) 66 TTJ (Chd) 656, 687 2.9 The submissions of the assessee which are summarised above, were forwarded to the assessing officer who has submitted his comments vide letter dated 2-6-2000. The assessing officer has reiterated his findings in the assessment order. The assessing officer's comments were again communicated to the assessee, who has, inter alia, submitted the following counter- comments :
"The assessing officer has only reiterated the stand taken at assessment stage and nothing fresh has been stated. He has given no reasons in support of his contention that the reference was correctly made, or how the DVO who is not an authority under the Income Tax Act issued notice under section 131 which was challenged by the assessee and request rejected only after the inspection had been done. Regarding withholding of Inspector's report, he submits that any enquiry done at the back of assessee if is to be used against him must be confronted for rebuttal and the assessing officer has ignored the legal provisions in this regard and settled view expressed by various courts including the Supreme Court, Moreover, whether Inspector was qualified for the purpose of determining the cost is yet under doubt. Regarding exercise of powers under section 131(1)(d) by the assessing officer, he submits that the same could be done only after recording a satisfaction that it was necessary to do so and basis for the same has to be ascertained, but no such satisfaction has been recorded and the power had to be exercised judiciously to determine whether the matter regarding valuation of stock-intrade could be referred to the DVO as he has not exercised this power in the case of any other builder whose assessments were completed by him during this period only for reasons best known to him alone."
2.10 The Commissioner (Appeals) considered the findings of the assessing officer, the submissions of the assessee, the comments of the assessing officer and the counter-reply of the assessee. She observed that the report of the DVO was only advisory in nature. But the assessing officer has taken this report to be gospel truth. In her view the addition made on the basis of difference worked out between the value of stock-in-trade reflected in the balance sheet/P&L a/c and the books and as determined by the DVO was not called for. Firstly, because valuation of stock-in-trade/work-in-progress has to be done as per prescribed method given in section 145A which was a procedural section and applied to all pending proceedings. The basis on which the said valuation was made was not provided to the appellant. Unless the conditions precedent for making a reference were satisfied, the assessing officer could not make a reference in exercise of general power of enquiry as held in the case of Hotel Amar v. CIT (1993) 200 ITR 785 (Ori). In the case of Prem Hotel v. Income Tax Officer (1997) 93 Taxman 237 (J&K), it has been held that the procedure prescribed under section 131(1)(d) cannot be adopted without giving first a hearing to the assessee because it is a settled principle of law that if a person expresses doubt about the account furnished by the assessee, he must atleast be given a shown-cause notice. Thus, the very basis for making a reference being missing and reference having been made in utter disregard of legal provisions it cannot be held valid and addition made on the basis of such invalid reference cannot be sustained. It may be mentioned that in the past also the same assessing officer assessing other builders being assessed in his charge like Puspanjali Construction Co. and Kaveri Resorts (P) Ltd., no reference to valuation cell has been considered necessary and rightly so, because such a reference is not provided in respect of valuation of stock- in-trade/work-in-progress which is part of P&L a/c and cannot be termed as investment calling for a reference.
2.11 She further held that in view of the above discussion as also the fact that the DVO's report was arbitrary and without basis, the addition made is ordered to be deleted. It is not found necessary to go into the merit of the valuation report as the very basis for reference has been knocked down. It may be mentioned that the valuation report was been found to be highly arbitrary.
2.12 The revenue is in appeal before us against the findings of the Commissioner (Appeals).
2.13 It is argued by the learned Departmental Representative that the Commissioner (Appeals) has not gone into the merits of the addition. While deleting the addition made by assessing officer, the Commissioner (Appeals) has held that reference to the DVO for determining the cost of construction was invalid. It was argued that such finding of the Commissioner (Appeals) was against the provisions of law. It was argued that powers of reference made to DVO are derived under section 142(2), which empowers the assessing officer to make inquiries which he considered proper for the purposes of obtaining full information in respect of income of any person. Reliance was placed on the decision of Hon'ble Andhra Pradesh High Court in the case of Daulat Ram & Ors v. Income Tax Officer & Anr. (1990) 181 ITR 119 (AP). It was also stated that similar issue was considered by the Hon'ble Madras High Court in the case of C.T. Laxman Das v. Assistant Commissioner (1994) 208 ITR 859 (Mad). Hon'ble Kerala High Court in the case of G. Sukhesh v. Dy. CIT (2000) 158 CTR (Ker) 118 has considered the scope of section 131(1)(d)/142(1A) of the Income Tax Act. In the said case the Hon'ble court has held that reference to the DVO was for the purpose of investigation. No illegality was committed by the assessing officer so as to interfere with his discretion.
2.14 Similarly, in the case of Shashi Devi v. Income Tax Officer & Ors. (1999) 154 CTR (MP) 1, the Hon'ble MP High Court had held that the commission issued to the DVO under section 131(1)(d) of the Act was a valid reference. Hon'ble Kerala High Court in the case of G. Sukesh (supra) had held that the DDIT (Inv.) was empowered to refer the case for valuation under section 131(1A) of the Act. In the case of CIT v. Basana Rani Shah 156 Taxation 130 (Gau), the Hon'ble Gauhati High Court had held that it was always open to the assessing authority to seek expert opinion about cost of construction of a building. Such power was derived from sections 131, 133(6) and 142(2) of the Act. The similar view was expressed by the Hon'ble Bombay High Court in the case of Jamuna Dass Madhav Ji & Co. & Anr. v. J.B. Panchal, Income Tax Officer & Anr. (1986) 162 ITR 331 (Bom). Learned Departmental Representative further argued that the Hon'ble Orissa High Court in the case of Hotel Amar v. CIT & Ors. (supra) had held that the DVO's report was a piece of evidence which the assessing officer obtained in the course of enquiry and it was open to the assessee to rebut the said valuation.
2.15 It was further argued by the learned Departmental Representative that once the reference was made to the DVO and his report has been obtained, the assessing officer has to give weightage to such report as it was an expert opinion. Before preparing the report, the DVO had given various opportunities to the assessee to put its case before him but the conduct of the assessee has been always non-co-operative which is evident from the fact that when assessing officer asked the assessee to produce relevant documents before the DVO, the assessee has replied the assessing officer that the necessary information has been furnished before the DVO. But what was done by the assessee was to challenge the powers of the DVO to call for information by issue of notice under section 131(1)(d) of the Act. It was stated that no different methods were applied by the DVO/assessing officer in estimating the cost of construction in the case of the assessee vis-a-vis the case of Anand Vrindavan. In both the cases, the DVO has based his report on the CPWD's circular.
2.16 It was further argued that at the time of appellate proceedings the assessee submitted its objections to the valuation report. The Commissioner (Appeals) thought it fit to ask for the comments of the DVO on the submissions of the assessee. These objections were received by the DVO on 25-5-2000 and he was to offer his comments within a week. The DVO sits in Jaipur and it, therefore, takes some time in preparing the comments and submissions thereof. The DVO informed the assessing officer accordingly. In turn, the assessing officer vide his letter dated 2-6-2000, informed the Commissioner (Appeals) that some more time may be needed by the DVO. But the Commissioner (Appeals) ignored the letter of the assessing officer and passed the order on 8-6-2000. It was stated that there was no hurry in deciding the appeal and a weeks' time for offering the comments of the DVO was too little a time. The Commissioner (Appeals) has, therefore, passed the order in hurry without considering the total facts of the case. It is further evident from the fact that the comments of the DVO dated 2-6-2000, were received by the Commissioner (Appeals) on 12-6-2000, but by that date, the Commissioner (Appeals) had already passed the appellate order. Thus, it is not a case of inordinate delay on the part of the DVO in submitting his comments.
2.17 Learned Departmental Representative also stated that the Commissioner (Appeals) was not justified in observing that the DVO cannot estimate the cost of investment in stock-in-trade. It was stated that such finding of the Commissioner (Appeals) was against the provisions of law. Learned Departmental Representative further stated that supposing search and seizure operation under section 132 of the Act takes place at the premises of a jeweller, the jewellery in that case was stock-in-trade. But the approved valuers of the jewellery are always called and they estimate the investment in the stock-in-trade. There was nothing illegal about it. No law prohibits so. An addition under section 69 of the Act was permissible if there was difference between the cost of investment in the stock-in-trade declared by the assessee and valued by the approved valuer. In the case of the assessee, the building was a stock-in-trade and, therefore, the DVO had every authority to value the cost of investment in the stock-in-trade. When the assessing officer found that there was a vast difference between the cost of construction declared by the assessee and as estimated by the DVO, the assessing officer had every right to consider this vital fact while making the assessment. It is an admitted position that the DVO's report was not a gospel truth but at the same time such report has an evidenciary value and has to be considered while computing the income of the assessee. Once the assessee fails to do so, the assessing officer cannot be faulted.
2.18 Leaned Departmental Representative also stated that the Commissioner (Appeals) was not justified in stating that the provisions of section 145A were only declaratory in nature. Such provision was on substantive law and has been brought on the statute with effect from 1-4-1999. Prior to assessment year 1999-2000, the provisions of section 145(3) were validly invoked by the assessing officer. In this regard, the learned Departmental Representative made the following submissions :
1. During the assessment year 1997-98 (financial year 1996-97) the assessee changed its method of accounting from completed contract method to percentage of completion method for recognising revenue.
2. The Institute of Chartered Accountants of India has published an accounting standard No. 7(AS-7)(copy enclosed) for accounting for construction contracts. Accounting to the standard, a contractor can follow either of the two methods for recognising its revenue, viz., (i) completed contract method of accounting, or (ii) percentage of completion method of accounting. Under the first method, revenue is recognised when the project gets completed, whereas under the second method revenue is recognised as the work progresses on year to year basis, subject to final accounting on completion of the project.
3. Under the method followed by the assessee, which is the percentage of completion method of accounting, the contractor prepares a cost sheet estimating all the direct costs required to complete the project and the difference between estimated cost and the contract value in the estimated GP. This estimated GP is divided by estimated cost and expressed in percentage, which is the estimated GP rate to be applied from year to year for recognising revenue, as per the percentage of completion method of accounting. -
4. At the end of each financial year GP is determined by applying the estimated GP rate on the cost of work certified and when this estimated GP is added to the cost incurred on the project during the year, it gives the value of work done which is the sales turnover. This is followed from year to year till the project gets completed.
5. It appears that an impression has been generated that the assessee has not shown any sales from these projects. In this connection it is stated that the assessee has specified in Note No. 6 (copy of audited accounts for the year ended 31-3-1997, enclosed for perusal and ready reference), to accounts attached to and forming part of annual accounts as at 31-3-1997, that "during the year the management has created the value of work done as sales turnover". Thus, there can be no denial that the assessee has not made any sales during the year.
6. Further, if the assessee intends to mean that sales means bookings and that he has not made any booking during the year, this view cannot be accepted as :
(a) firstly, as booking has no co-relation with the sales turnover figure shown in the P&L a/c, which is the value of work done determined by the assessee on the basis of his cost sheet and not the actual sale. The actual sale is adjusted in the P&L a/c only in the year when project gets completed and is closed.
(b) secondly, attention is invited to page 9.3 of AS-7, which clearly says that "progress payments and advances received from customers may not necessarily reflect the stage of completion and, therefore, cannot usually be treated as equivalent to revenue earned".
Hence, the revenue credited to the P&L a/c need not necessarily have a corelation with the receipts from customers. However, under the head current liabilities and provisions in the balance sheet as at 31-3-1997, the assessee has shown "Deposits from customers" amounting to Rs. 1, 18,56,690.35, against which the value of work done credited in the P&L a/c is only Rs. 84,18,531.00. The assessee is intentionally trying to misrepresent the facts that no sale has been made. The amount above is the advances received against sale of flats, etc., which are under construction by the assessee. This is further substantiated by the fact that the auditors in the tax audit report have not shown this amount as deposits under section 269SS of the Income Tax Act, 1961. Had the nature of these amounts been of deposits, they should have been reflected in the tax audit report.
7. The assessee has contended that undisclosed expenditure (deemed to be the income under section 69C of the Income Tax Act, 1961), should be allowed as an admissible business deduction. If the assessee's claim is accepted then the assessee's construction account will have to be reworked and the entire expenditure including the unexplained expenditure would be debited to the P&L a/c. Further, the estimated GP attributable to the construction expenses including on the unexplained expenditure will be debited to the P&L a/c and the resultant total will be credited as value of work done on the income side.
This is as per the percentage of work completed method of accounting, which has been followed by the assessee from the assessment year 1997-98, onwards by changing from the completed contract method of accounting as stated in the notes to accounts.
8. It is further submitted that the trading account of a builder differs from that of an ordinary trader/manufacturer. In the case of ordinary trading account, the opening stock, purchases, sales and closing stock are known and the balancing figure is the GP. However, in the case of a builder the opening stock, purchases, closing stock and GP are known and the turnover is the balancing figure, when the builder follows the percentage of work completed method of accounting. Thus, any variation in the trading account will correspondingly vary the turnover figure.
9. It is further submitted that during the assessment proceedings, assessing officer asked the assessee vide questionnaire dated 15-2-2000, (copy enclosed) to furnish the rate per square feet for cost of construction and of sale. However, assessee vide letter dated 3-3-2000, (copy enclosed) did not submit the same and the explanation given by the assessee appears to be evasive.
10, It has already been brought on record that the assessee does not maintain the separate stock register for each of the project, including contract work (which has no link with the sites referred for valuation). No record of work-in-progress (WIP) has been maintained, The building construction account as maintained in the books of accounts of assessee (copy enclosed), again does not show the project-wise details. The same has been admitted by the auditors vide Note No. 8 under the head "Project/contract construction a/c". In view of these deficiencies, the books of account of the assessee have been rightly rejected under section 145(3)".
2.19 Learned Departmental Representative also relied on the decisions in CIT v. British Pamts India Ltd. (1991) 188 ITR 44 (SC), CIT v. B.N.B. Enterprises (2000) 242 ITR 439 (Mad), Ram Chandra Singh Ramniklal v. CIT (1961) 42 ITR 780 (Pat), Amiya Kumar Roy & Anr. v. CIT (1994) 206 ITR 306 (Cal) and Agarwal Bros. v. Income Tax Officer (1993) 45 TTJ (Ind) 238.
3. On the other hand, learned counsel of the assessee stated that for rejecting the books of account, the assessing officer has to point out the defects either in the books of account or in the method of accounting. As per provisions of section 145(3), the books could be rejected where the accounting standard as notified under sub-section (2) of section 145 has not been regularly followed by the assessee. But as in the instant case, such accounting standard has been regularly followed, there was no question of even invoking the provisions of section 145(3) of the Act. It was also stated that no difference in the stock was found. No vouchers were missing and all the purchases were vouched. It was stated that admittedly the building was stock-in-trade and no reference to the DVO could be made for estimating the cost of investment in the stock-in-trade. It was also stated that before making reference to the DVO, the assessing officer has to give basis for the same. Such basis was never disclosed by the assessing officer. It was also stated that in his order, the assessing officer had mentioned about certain discrete enquiry. It was not understood as to what was such discrete enquiry. The reliance was also placed on the decisions in CIT v. Late Sunder Lal Through Bankey Beharilal (1974) 96 ITR 310 (All), Baidya Nath Sarma v. CWT (1983) 140 ITR 801 (Gau) and Mohammed Ali v. CWT (1983) 141 ITR 690 (Gau). It was also stated that while calling for the information, the DVO has issued notice under section 131. It was stated that under the provisions of the Income Tax Act, the DVO has no power to call for information by issue of notice under section 131 of the Act. Such notice was illegal, therefore, the Commissioner (Appeals) has rightly held that the reference made to the DVO was illegal. It was also stated that the DVO's report was only an opinion and not binding on the assessing officer. It was stated by the learned counsel that the DVO has given his opinion in respect of investment in both the properties, namely, Friends Apartments and Friends Palace. The assessing officer has accepted the report of the DVO in respect of Friends Apartments but has ignored the opinion in respect of Friends Palace. While relying on the Supreme Court's decision reported in Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC), the learned counsel stated that the principles of harmonious construction have to be followed and as the assessing officer has not given any reasons for making reference to the DVO, the Commissioner (Appeals) was justified in holding that the reference by the assessing officer to the DVO under section 131(1)(d) of the Act was illegal.
4. We have considered the rival submissions. The facts have been mentioned above. It appears that when the DVO estimated the cost of investment in the Friends Apartments, which forms the basis of addition under section 69 by the assessing officer, the same was challenged before the Commissioner (Appeals). The Commissioner (Appeals) has referred these objections in her order also but instead of giving a finding on merits, the Commissioner (Appeals) accepted the claim of the assessee by holding that reference to DVO was invalid and, therefore, any addition based on such reports had to be deleted.
5. We have, therefore, examined the findings of the Commissioner (Appeals) in his regard. Section 142(1) of the Act provides that for the purpose of making an assessment, the assessing officer can ask the assessee to furnish a return of income or other documents as the assessing officer may require. Sub-section (2) provides that for the purpose of obtaining full information in respect of the income or loss of any person, the assessing officer may make such enquiry as he considers necessary. By virtue of powers under section 131(1)(d), the assessing officer has got powers to issue commission for the purposes of obtaining information in respect of income or loss. Such commission could be issued for seeking opinion of an expert during the course of assessment proceedings. There is no prerequisite for issuing commission. The opinion of the expert is not a gospel truth but certainly it has got persuasive value. Such opinion is not binding on the assessing officer but it does not mean that the commission issued by the assessing officer was invalid. Hon'ble Andhra Pradesh High Court in the case of Daulat Ram & Ors.(supra), in connection with reference to DVO under section 55A of the Act observed as under :
"We apprehend, we are not persuaded to accede to this submission as it would be causing violence to the very explicit language used in the very section apart from the contextual interpretation. The mere residence of the section within the sub-chapter "capital gains" cannot be a guidance to hold that it pertains to that sub-chapter alone inasmuch as, as pointed out earlier, the word "Chapter" occurring in the section, is crucial incoming to this conclusion. The word employed is chapter and not "Capital gains", which amply and unambiguously demonstrates the intention of the legislature."
6. The above view was also reiterated by the Hon'ble Andhra Pradesh (sic Madras) High Court in the case of Commissioner Laxman Das (supra). Hon'ble Kerala High Court in the case of G. Suresh (supra), had considered similar issue and observed as under :
"Petitioner is aggrieved by Ext. P6 order issued by the DDI, Investigation, Trivandrum, directing valuation of the petitioner's properties. According to the petitioner, this order was passed under section 131(1)(d) of the Income Tax Act, which would not enable the first respondent to order a valuation. Counsel for respondents submitted that under section 131(1)(d) read with section 131(1A) the first respondent has got the power to call for a valuation when he takes up investigation. I have gone through the said provision, especially section 131(1A). Counsel for the department submitted that section 131(1)(d) was misquoted and in any view the first respondent has got jurisdiction under section 131(1A) of the Income Tax Act to get a valuation report. Reference was also made to the decision in Jamnadas Madhaiji & Co. v. ITO (1986) 162 ITR 331 (Bom) : TC 60R. 97. I am of the view it is only for the purpose of investigation first respondent called for a valuation report from the 2nd respondent. I do not find any illegality committed by the officer so as to interfere with the direction."
7. In the case of Shashi Devi (supra), the Hon'ble Madhya Pradesh High Court considered the issue and held as under :
"The submission of the learned counsel for the petitioner that the department is making an investigation on basis of the declaration would not be correct. The department is entitled to make an investigation into the income which has been explained and is certainly entitled to issue commissions for valuation of the property. When it is expected from an assessee that he would be honest and would pay the proper tax then it cannot be gainsaid that because some income has been declared, therefore, the department would have no jurisdiction to make any investigation into the amount invested or the amount explained. In fact, the department wants to make an investigation into the amount truly invested in raising the construction. If the department comes to the conclusion that more than 10,89,000 rupees were spent in raising the construction they would certainly be entitled to take suitable proceedings under the Income Tax Act against the declarant/assessee".
8. In view of above judicial pronouncements, we have no hesitation in holding that the assessing officer was within his rights in issuing commission under section 131(1)(d) of the Act to the DVO seeking his opinion on the cost of investment in the construction of Friends Apartments. Commissioner (Appeals)'s findings in this regard are reversed. Consequently, the DVO who sits in the shoes of the assessing officer by virtue of commission under section 131(1)(d) could call for the information from the assessee under the above section.
9. Section 145(1) provides that the income chargeable under the head "profits and gains of business" 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. Sub-section (2) provides that the Government may notify the accounting standard to be followed by any class of assessees or in respect of any class of income. Sub-section (3) provides, that where such accounting standards have not have regularly followed, the assessing officer may make an assessment in the manner provided in section 144. The Institute of Chartered Accountants of India has published an accounting standard No. 7 (AS-7) for construction contracts. According to the standard, a contractor can follow either of the two methods for recognising its revenue i.e., either completed contract method or the percentage of completed method. The assessee is following the percentage of completion method of accounting. The contractor prepares a cost sheet estimating all the contract costs required to complete the project and difference between estimated cost and the contract value is the estimated gross profit. The Commissioner (Appeals) in his order has referred to the provisions of section 145A, i.e., the method of accounting in certain cases. This section prescribes the method of valuation of stock-in-trade. But this section came on the statute by Finance (No. 2) Act, 1998, with effect from 1-4-1999. This is substantive provision of law which was brought on the statute with a prospective date. As the assessment year in question is 1997-98, such provision was not on the statute. Thus, shelter could not be taken under this section. We, therefore, do not agree with the finding of the Commissioner (Appeals) that section 145A was only a procedural section and, therefore, applies to all the pending assessments. While rejecting the finding of the Commissioner (Appeals), we are further fortified by wording of section 145A which begins with the word "notwithstanding anything to the contrary contained in section 145." This clearly indicates that the section brought on the statute was substantive and not procedural in nature.
10. A question has also been raised by the learned counsel to the effect that as the building in the case of the assessee was stock-in-trade, no addition under section 69 could be made even if there was difference in the investment declared by the assessee and estimated by the assessing officer. Section 69 is a part of Chapter VI. This chapter deals with the aggregation of income and set off or carry forward of loss. First part talks of aggregation of income which covers the sections 66 to 69D of the Act. In section 69, nowhere it has been provided that the section will be invoked only if certain undisclosed investments were made in a capital assets. If no such provision has been made in the section, it will be far-fetched argument that the addition under section 69 of the Act could be made only when the undisclosed investment was made in a "capital asset". We fully agree with the observations of the learned Departmental Representative that in a case of a jewellery, the jewellery was a stock-in-trade. When search and seizure operation takes place, the jewellery which is stock-in-trade is valued and the cost of investment is estimated. The addition under section 69 could be made if there was difference between the cost of investment in the stock-in-trade declared by the assessee and estimated by the authorised valuer. The finding of the Commissioner (Appeals), therefore, did not find favour with us.
11. We have also perused the DVO's report. Certain inherent contradictions have been pointed out by the assessee in its objections before the Commissioner (Appeals), a copy of which was also forwarded to the DVO. The DVO visited the property about two and half years after the close of the accounting period. In absence of any data submitted by the assessee how the DVO has imagined the cost of investment in the construction is not understood. That too, the DVO has estimated the cost of construction in each year and the addition of the differential cost of construction pertaining to the year under consideration has been made, and in respect of earlier years, the assessing officer had proposed to take remedial action by issue of notice under section 148. We have also noticed that in respect of both the properties, the assessee had claimed that these were incomplete. The assessing officer had asked the assessee to furnish the figures of investment made by the assessee during the financial year 1999-2000. Such information was called in March 2000 by which the cost of investment up to 31-3-2000 was asked for. This is humanly impossible to furnish the figure. When the financial year was yet to close, how the assessee could be asked to furnish the figures of investment made up to the end of the financial year. We also find that the assessing officer accepted the claim of the assessee in regard to the Friends Palace and, therefore, did not make any addition under section 69 of the Act. But why he did not accept the contention of the assessee in respect of Friends Apartments, though the same was incomplete. No reasons have been given by the assessing officer for doing so. We are making these observations keeping in fact that the DVO in his report had also estimated the cost of construction in the Friends Palace. Such contradictions remained to be reconciled.
12. Keeping above facts and views, we feel that the Commissioner (Appeals) should have considered the DVO's report on merit rather than holding the reference under section 131(1)(d) as illegal. Needless to say that the DVO has submitted his report to the assessing officer who followed the same in respect of Friends Apartments. The assessee chose to file his objections to the said report before the Commissioner (Appeals). The Commissioner (Appeals) forwarded a copy of the same to the DVO for his comments. The DVO's comments were to be obtained within a week from the receipt of the Commissioner (Appeals)'s letter. The DVO was stationed in Jaipur and he informed the assessing officer to make a request to the Commissioner (Appeals) to grant a little more time in furnishing the comments. The assessing officer vide his letter dated 2-6-2000, appraised the Commissioner (Appeals) this fact. The DVO's comments are dated 2-6-2000, which were received by the Commissioner (Appeals) on 12-6-2000, but by that date, the order was already passed by the Commissioner (Appeals). The approximity of the dates will clearly show that there was undue delay on the part of the DVO in offering his comments. The Commissioner (Appeals), therefore, acted in haste and passed the order even without waiting for the comments of the DVO when she was specifically informed on 2-6-2000, that the comments of the DVO are likely to be received very soon. We are making these observations keeping in view the fact that a weeks' time given to the DVO who sits in Jaipur was too little a time. Under the circumstances, we set aside the order of the Commissioner (Appeals) on this point and direct him to consider the valuation report on merits. While doing so, the Commissioner (Appeals) will consider various objections raised by the assessee and will also provide reasonable opportunity to the assessee as well as the assessing officer to put their claim. For statistical purposes, the ground of appeal raised by the revenue is allowed.
13. Ground Nos. 4 and 5 relate to the application of net profit rate at 4 per cent by the Commissioner (Appeals) as against 8 per cent and 10 per cent applied by the assessing officer on the contract receipts/work-in-progress.
14. As mentioned earlier, apart from developing its own project, the assessee has also done some job on contract basis. It has declared gross receipt of Rs. 12,83,350 under this head. As the assessing officer had already rejected the books of account maintained by the assessee, he applied 8 per cent net profit rate on such contract receipts and brought the same to tax.
15. There were certain incomplete projects which the assessee was doing on contract basis. The assessing officer applied 10 per cent net profit rate on the value of work-in-progress and brought the same to tax.
16. On appeal, the Commissioner (Appeals) directed the assessing officer to apply 4 per cent net profit rate on entire contract receipts/work-in-progress, i.e., for completed project as well as incomplete projects. The revenue is in appeal before us against the finding of the Commissioner (Appeals).
17. It is argued by the learned Departmental Representative that once the Commissioner (Appeals) herself has directed to apply a particular net profit rate on the contract receipts, it was evident that the books of account of the assessee have been rejected by the Commissioner (Appeals). Under these circumstances, there was no occasion for the Commissioner (Appeals) to reduce net profit rate from 8 per cent or 10 per cent (as the case may be) to 4 per cent.
18. Learned Departmental Representative also stated that while directing to apply 4 per cent net profit rate, the Commissioner (Appeals) has observed that this net profit rate was adopted by the assessing officer in respect of other builders. It was stated that such observation made by the Commissioner (Appeals) were not correct as the same were not verifiable from the records of those builders. She, therefore, pleaded that the issue may be set aside and restored back to the file of the assessing officer/Commissioner (Appeals) to verify the correctness of the figure.
19. On the other hand, learned counsel supported the orders of the Commissioner (Appeals).
20. We have considered the rival submissions. We find that in respect of completed projects, the assessing officer had applied 8 per cent net profit rate on the receipts whereas in respect of non-completed project, he had applied 10 per cent net profit rate on the work-in-progress.
21. On appeal, the Commissioner (Appeals) directed to apply a net profit rate of 4 per cent on all the receipts. While giving this direction, the Commissioner (Appeals) has observed that this net profit rate was applied by the assessing officer in the case of two other builders. Thus, she has given her reasons for application of 4 per cent net profit rate. The two builders were renowned builders and in case the revenue was of the opinion that the facts in the case of the other two builders were not same, which has been stated by the Commissioner (Appeals), it was at liberty to rebut the same by bringing contrary evidence. We also find that the assessee has also challenged the adoption of 4 per cent net profit rate by the Commissioner (Appeals). Thus, while adjudicating assessee's appeal, we will consider this issue there. However, the revenue's appeal on this ground is dismissed.
22. In the result, the revenue's appeal is allowed for statistical purposes in respect of ground Nos. 1 to 3 and the appeal on ground Nos. 4 and 5 is dismissed.
23. Now, we will take up the appeal directed by the assessee.
24. The only ground taken by the assessee was against sustaining the income on contract receipts @ 4 per cent of the gross receipts on completed project as well as the work- in-progress. While directing to apply 4 per cent net profit, the Commissioner (Appeals) has observed that this net profit rate was applied in respect of the other builders. The learned counsel has stated that before giving the directions, the Commissioner (Appeals) has not verified the facts of the other two assessees. It was stated that such addition has been made by rejecting the books of account. The only reasoning for rejecting the books of account appears to be the fact that no separate issue register for contract business was maintained. It was stated that this reasoning was not so grave as to warrant the rejection of basis of accounts. On the other hand, learned Departmental Representative supported the case or order of the Commissioner (Appeals).
25. We have heard the rival submissions. It is settled law that the books of account could be rejected on cogent reasons. The addition to trading results could be made only when the proviso to section 145(1) and provisions of section 145(3) are invoked. The only reasoning for invoking section 145(3) appears to be non-maintenance of separate issue of stock register. The reasoning is not so grave to warrant rejection of books of account. We, therefore, hold that Commissioner (Appeals) was not justified in directing to apply 4 per cent net profit rate on contract receipts/work-in-progress. The assessing officer is directed to accept the book results declared by the assessee in respect of business carried on contract basis. The ground of appeal directed by the assessee is allowed.
26. In the result, the appeal filed by the assessee is allowed.
27. Before parting, we may keep on record with deep appreciation the manner in which the revenue's case was placed before us by the learned Departmental Representative, Smt. Sunita Bainsala. The learned Departmental Representative with all her might placed the arguments of the revenue. Learned counsel of the assessee, Shri Prakash Narain, Adv., was thorough as usual. We order accordingly.