Income Tax Appellate Tribunal - Lucknow
M/S M. A. Builders Pvt. Ltd, , Lucknow vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
LUCKNOW BENCH "A", LUCKNOW
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND
SHRI J SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA No.564/LKW/2011
Assessment Year:2008-09
Income Tax Officer IV(4) v. M/s M.A. Builders Pvt. Ltd.
Lucknow 255/388, G-15, Mumtaz Market
Aminabad, Lucknow
PAN:AABCM7856L
(Appellant) (Respondent)
Appellant by: Shri. Praveen Kumar, CIT (DR)
Respondent by: Shri. Rajiv Joshi
Date of hearing: 22.03.13
Date of pronouncement: 28/05/2013
ORDER
PER SUNIL KUMAR YADAV:
This appeal is preferred by the Revenue against the order of the ld. CIT(A) on the following grounds:-
1. The Ld. CIT(A)-II has erred in law and on facts in failing to appreciate that the books of accounts of the assessee had been correctly rejected u/s 145(3) of the I.T. Act, 1961. This being so the A.O. was not in a position to determine whether they are correct or complete. In this situation the A.O. was left with no option but to estimate the assessee's income on the basis of material available with him.
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2. The Ld, CIT(A)-II has erred in law and in facts in restricting the net profit to 10% gross of receipts of the assessee. He failed to appreciate that the correct profit was the sale price as reduced by the cost of the same i.e. the sum of the value of closing stock and work in progress.
3. The Ld. CIT(A)-II, has erred in law and facts in deleting the addition of `3,73,000/- made by the A.O. u/s 69C of the IT. Act, 1961.
2. Grounds No.1 and 2 relate to the rejection of the books of account and estimation of profit at 10% of the gross receipts.
3. The facts in brief culled out from the orders of the lower authorities on this issue are that the assessee derives income as a builder and declared total income at `2,91,032, but the assessment was completed under section 143(3) of the Income-tax Act, 1961 (hereinafter called in short "the Act") at a total income of `74,49,836. During the course of assessment proceedings, the assessee has furnished audited balance sheet and profit and loss account but could not produce the books of account, bills/vouchers despite various opportunities. The Assessing Officer treated the entire receipts of `67,85804 from prospective buyers, as income for the impugned assessment year after rejecting the books of account.
4. The assessee preferred an appeal before the ld. CIT(A) with the submission that the Assessing Officer has rejected the books of account despite the fact the accounts are duly audited and the audited balance sheet and profit and loss account were filed before the Assessing Officer. Simply because the assessee was following project completion method of accounting does not entails the Assessing Officer to conclude that the method of accounting adopted by the assessee is not correct and to :-3-:
conclude that profits for the year under consideration cannot be correctly arrived at following the assessee's method of accounting. It was also contended before the ld. CIT(A) that the assessee had been following the same method of accounting and the same had been accepted in earlier years also. The assessee has been following project completion method wherein the total profit was offered for taxation as and when the project was completed and till then all expenses were capitalized and debited to the project account and this method of accounting had been accepted in earlier years by the Department. Therefore, there is no justification for rejecting the books of account and estimating the profit on work-in- progress under section 145 of the Act.
5. The ld. CIT(A) reexamined the issue in the light of assessee's contention and various judicial pronouncements and having noted that the assessee has been following project completion method and simply he could not place the books of account, estimated the profit at 10% of the gross receipts after approving the rejection of the books of account on its non-furnishing despite various opportunities by the Assessing Officer. He accordingly directed the Assessing Officer to assess the income of the assessee at `10,68,532. The relevant observations of the ld. CIT(A) are extracted hereunder:-
"5(3)(i) I have examined the facts and circumstances of the case. I have considered the submissions of the appellant and I have also perused the findings of the Assessing Officer. The assessment order passed by the AO is based on the method of accounting prescribed under section 145 of the Act. There are 3 limbs to the said provision -
• Method of accounting regularly followed by the assessee.
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• Accounting standards as notified followed by the assessee. • Correctness or completeness of the accounts of the assessee.
The AO begins the examination of the case of the assessee by observing at page 2 of the assessment order that - This implies that the revenue has to be recognized for every investment made in the project and depending on the extent of completion of the project, a corresponding portion of the net profits to be arrived at subsequently should have been offered for taxation. This is keeping with the accounting standards currently in force as per the section 145 of the I.T. Act, 1961. He therefore issues a show cause to the assessee that - why percentage completion method may not be applied in view of project completion method adopted through AS-7. The appellant responded vide its letter dated 20.12.2010 by submitting that the Accounting Standard -7 (AS-7) has been regularly followed by the company. The AO, however, did not accept the contention of the assessee in absence of books of accounts and documents.
Thereafter, at page 4 in paragraph 4.5 of the assessment order the AO observes that -it also transpires that substantial amount of advances against shops appear to have been spent by the assessee in other projects, which itself proves that the assessee was almost near by the completion of the project...". This observation clearly suggests that the AO is talking about Project Completion method of the accounting. However, at page 5 of the assessment order the AO has finally given a conclusive finding that - In the absence of any books of account and bills/ vouchers it was not possible to place any reliance on the documents furnished by the assessee and thus the books of account may be :-5-:
treated as not in existence, unreliable and thus rejected u/s 145(3) of the Act.
The appellant on the other hand has submitted that there is no change in the method of accounting regularly followed by it. It has been following Project Completion Method regularly and its books of accounts have been audited. It was vehemently argued that the AO was not justified in rejecting the books of accounts. 5(3)(ii) Hon'ble The Supreme Court in the cases of CIT v. M/s. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) and CIT v. Realest Builders & Services Ltd [2008] 170 TAXMAN 218 (SC) has emphasized the importance of method of accounting regularly employed by the taxpayer. The Supreme Court in the case of Realest Builders & Services Ltd. has held that the tax department needs to provide facts and figures that the impugned method of accounting adopted by the taxpayer results in underestimation of profits for changing the method of accounting under Section 145 of the Act. Otherwise, it will be presumed that the entire exercise is revenue neutral. Method of Accounting regularly followed by the taxpayer which was accepted by the AO in past cannot be rejected in future years without expressing the dissatisfaction about the correctness or completeness of the accounts of the assessee. Recently, the Madras High court in case of SAS Hotels & Enterprises Limited 334 ITR 194 (Mad) held that the Assessing Officer should not reject the method of accounting which is in accordance with Section 145(1) of the Act and is regularly followed by the taxpayer. The High Court held that the AO cannot invoke Section 145(3) of the Act and complete the assessment under Section 144 of the Act unless he :-6-:
has expressed his dissatisfaction about the correctness or completeness of the accounts of the taxpayer. 5(3)(iii) In the impugned case, although the AO has referred to the method of accounting and accounting standards, nowhere has any adverse finding been given thereon. In fact the AO has specifically taken recourse to the provisions of section 145(3) of the Act and has given a finding on being not satisfied with correctness and completeness of the accounts of the assessee as the books of accounts and documents were not produced for examination before the AO. The fact that the books of accounts have not been produced before the AO is not disputed and hence I find that the AO is justified in rejecting the books of accounts of the assessee and completing the assessment in the manner provided in section 145(3) of the Act, which is a best judgment assessment as per provisions o section 144 of the Act. 5(4)(i) The scope of assessment under section 144 of the Act i.e. the best judgment assessment has been examined in a number of cases by various courts. In CIT v. Laxminarain Badridas [1937] 5 ITR 170 (PC) their Lordships of the Privy Council observed as follows:
"The officer is to make an assessment to the best of his judgment against a person who is in default as 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 Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous :-7-:
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; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense, too, the assessment must be, to some extent, arbitrary."
Since the law relating to "best judgment assessment" is the same both in the case of income-tax assessment and sales tax assessment, the following observations in Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770, 778 (SC), a case under the Bihar Sales Tax Act, would be material:
'No doubt it is true that when the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion."
Again in State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC), which was a case under the Travancore-Cochin General Sales Tax Act, the court observed:
"The limits, of the power are implicit in the expression 'best of his judgment'. Judgment is a faculty to decide matters with wisdom truly and legally. Judgment does not depend upon the arbitrary caprice of a judge, but on settled and invariable principles of justice.
Though there is an element of guesswork in a 'best judgment assessment', it shall not be a wild one, but shall have a reasonable nexus to the available material and the circumstances of each case."
5(4)(ii) In the impugned case, the AO has assessed the amount of Rs.67,85,804/- as income of the assessee. The said amount of :-8-:
Rs.67,85,804/- has been worked out by deducting the closing stock and work in progress from the advances received from the customers against sale of shops. Since, the books of accounts of the assessee have been rejected by the AO; I find that the method of estimation adopted by the AO will amount to disturbing the method of accounting regularly followed by the assessee. This is so because in either of the two methods i.e. percentage completion method or project completion method, the starting point for revenue recognition will be the receipts on account of sale of shops. In other words the method of estimation adopted by the AO is not justified. Further, the AO has adopted the figure of advance for shops as appearing in the balance sheet as at 31.03.2008. This figure of Rs.1,06,85,327/- includes the advance received till 31.03.2007 amounting to Rs.94,38,700/-. Needless to say that entire receipts pertaining to advance for shops received from customers could not be said to constitute the income of the appellant. The AO is therefore not justified in estimating the income of the assessee as equivalent to the receipts on account of advances from customers for sale of shops.
5(5)(i) Nevertheless, it has been laid down by Hon'ble Calcutta High Court in the case of Dabros Industries Company (P) Ltd Vs CIT (1977) 108 ITR 424 (Cal) as under -
Accounts - rejection -ITO applied s.145 and made certain additions on the basis of past performance in absence of proper accounts to arrive at a correct profit -rejection and estimation on the basis of available material justified - once the books of accounts of an assessee are rejected then profit has to be estimated on the basis of available material.
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Similar decisions have been given by Hon'ble ITAT, Jaipur bench in the case of Navneet R Jhanwar Vs ITO (2004) 1 SOT 541 and Jodhpur Bench in the case of ITO Vs Kundanmal Surana(2004)3 SOT 632.
5(5)(ii) In view of above, I am of the opinion that once the books of accounts of the assessee have been rejected under section 145(3) of the Act, the best course available to the AO to estimate the income of the assessee to the best of his judgment as per section 144 of the Act is to estimate the profit of the assessee as a percentage of receipts. The appellant is constructing Mumtaj Market project and also other projects. Hence the estimation of profit has to be a percent of receipts received in respect of the said projects. The assessee has shown total receipts up to 31.03.2008 received against sale of shop at Rs.1,06,85,327/-. The business of the assessee is construction of projects and therefore the estimate of profit @ 10% of the said receipts of Rs.1,06,85,327/- appears to be reasonable. The AO is therefore directed to assess the income of the appellant at Rs. 10,68,532/-. The addition made by the AO is therefore confirmed to this extent and the relief to the appellant is Rs.57,17,272/-. The ground of appeal is allowed partly."
6. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed heavy reliance upon the order of the Assessing Officer.
7. The ld. counsel for the assessee besides placing reliance upon the order of the ld. CIT(A) has contended that the assessee has been following project completion method of accounting, in which the profit was offered at the time of completion of the project. Therefore, the Assessing Officer has :-10-:
wrongly added the entire receipts as income of the assessee after rejecting the books of account.
8. Having given a thoughtful consideration to the rival submissions and from a careful perusal of record, we find that undisputedly the assessee has been following project completion method of accounting, in which the net profit can be offered at the time of completion of project. It is also undisputed fact that during the course of assessment proceedings the assessee did not produce the books of account and other documents as sought by the Assessing Officer. Therefore, the Assessing Officer has rejected the books of account of the assessee under section 145(3) of the Act and estimated the income. The rejection of books of account was approved by the ld. CIT(A), but the ld. CIT(A) has estimated the income at 10% of the gross receipts. The approach adopted by the ld. CIT(A) appears to be correct and reasonable in comparison to the Assessing Officer, who has treated the entire receipts to be the income of the assessee. Once the books of account are rejected and the assessee is not co-operating, the only option left with the Assessing Officer is to estimate reasonable income after taking into account the total receipts of that year. We, therefore, find no infirmity in the estimation of income by the ld. CIT(A) and we accordingly approve the same.
9. The next ground is with regard to the addition of `3,73,000 made under section 69C of the Act.
10. The ld. CIT(A) deleted the addition for the reason that once the books of account are rejected, the same cannot be relied for making an addition under section 69C of the Act. We agree with the findings of the ld. CIT(A) in this regard as once the books of account are rejected, no further :-11-:
addition can be made on the basis of entries made therein. We accordingly confirm the order of the ld. CIT(A) in this regard also.
11. In the result, appeal of the Revenue stands dismissed.
Order pronounced in the open court on 28/05/2013 Sd/. Sd/.
[J SUDHAKAR REDDY] [SUNIL KUMAR YADAV]
ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED:28/05/2013
JJ:1305
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
Assistant Registrar