Gauhati High Court
Madnani Construction Corporation P. ... vs Commissioner Of Income-Tax on 5 December, 2006
Equivalent citations: [2008]296ITR45(GAUHATI)
Author: D. Biswas
Bench: D. Biswas, A. Hazarika
JUDGMENT D. Biswas, J.
1. This appeal is directed against the order dated May 29, 2002, passed by the learned Income-tax Appellate Tribunal, Guwahati Bench, Guwahati, in I.T.A. No. 17 (Gauhati) of 1997. The appeal was admitted by this Court by the order dated February 7, 2003. By the order dated June 27, 2006, the question of law formulated at the time of admission of the appeal was recast as:
Whether, in the peculiar facts and circumstances existing in the NE States during the relevant year of assessment, the Tribunal is justified in confirming rejection of the books of account by the Assessing Officer and computing the net income of the assessee on the basis of 6 per cent, of the net receipts following the principles of best judgment assessment?
2. We have heard Mr. G.K. Joshi, learned senior Counsel for the appellant, and Mr. U. Bhuyan, learned standing counsel for the Revenue.
3. The appellant is a private limited company engaged in execution of works contracts. During the relevant period of the assessment of 1993-94, the appellant executed civil construction works at Jogighopa under NF Railways and at Barun in Uttar Pradesh under Sono Hydro Electric Project. The appellant received a sum of Rs. 4,39,37,225 on account of both the contracts. The appellant filed its return of income before the Deputy Commissioner of Income-tax (Assam), Special Range-I, Guwahati, showing the net profit of Rs. 19,31,889 at 4.39 per cent., along with the audited profit and loss account, balance-sheet and audited report as required under Section 44AB of the Income-tax Act, 1961. The Assessing Officer found that the expenses on account of purchase of raw materials were mostly vouched by internal debit vouchers which are not verifiable and whereabouts of various sundry creditors not ascertainable. The Assessing Officer issued show-cause notice dated January 17, 1996, calling upon the appellant to explain as to why the books of account should not be rejected and the net profit should not be estimated at a reasonable rate. The appellant, in its reply, objected to the above move and also submitted a comparative statement of gross profit for the last five years. The contention of the appellant was that it was not a fit case for rejection of books of account and assessment of net profit at a higher rate. The Assessing Officer in exercise of the powers under Section 145(2) of the Act rejected the books of account maintained by the appellant and completed the assessment on the principles of best judgment vide order dated February 14, 1996, under Section 143(3) of the Act determining the net profit at Rs. 35,14,978 from contract works and income from other sources like bank interest, sale of stock, etc., at Rs. 2,41,642. The Assessing Officer estimated the net profit at the rate of 8 per cent.
4. On appeal, the CIT (Appeals) was of the view that the provisions of Section 145 were wrongly applied without a finding that the books of account maintained were incorrect and profit could not be deduced from the same. The CIT (Appeals) directed the Assessing Officer to accept the net profit as disclosed in the books of account while disposing of the appeal vide order dated June 10, 1996. The learned Tribunal, on consideration of the materials, found that the net profit was estimated by the Assessing Officer on the higher side and upon consideration of the peculiar facts and circumstances estimated the net profit at the rate of 6 per cent. Being dissatisfied, the appellant has preferred this appeal challenging the order of the learned Tribunal on the ground that the rate of 6 per cent, is not tenable in the facts and circumstances of the case.
5. Mr. G.K. Joshi, learned senior Counsel for the appellant argued that the works at Jogighopa was that of formation of the bank for the railway track consisting of earth work and some bridges on the line, and various raw materials like stone chips, sand, ballast, stone gravel, stone boulders, bricks, etc., were purchased from local people residing in and around the work site. The local suppliers were not in organized sector and it was not possible to obtain printed bills and invoices from them. That apart, Mr. Joshi argued that the area was disturbed place due to insurgency. It is further argued that there is no material to show that the books of account maintained by the appellant are not correct and complete rendering it impossible to work out the profit. According to Mr. Joshi, the learned Tribunal's findings are contradictory and the profit could not be estimated at the rate of 6 per cent, particularly when the appellant had complied with the requirements of Section 44AB and also produced other relevant documents. The decision of the Tribunal, according to Mr. Joshi, is that of an arbitrator and not of an appellate authority.
6. Mr. Bhuyan, learned Counsel for the Revenue submitted that the identity of the sundry creditors could not be confirmed for want of particulars and the appellant also could not assist the Assessing Officer in this respect. According to Mr. Bhuyan, the learned Tribunal considered the matter in depth and estimated the net profit at 6 per cent, of the total receipt. According to learned Counsel, some amount of guess is always there in the matter of best judgment and no infirmity is found in the order of the learned Tribunal. That apart, according to Mr. Bhuyan, there is no question of law involved in this appeal.
7. We have considered the submission of learned Counsel for the parties in depth. The Assessing Officer did not record any finding that the books of account maintained by the appellant were incorrect rendering it impossible to deduce the profit and despite that he went to complete the assessment invoking the principles of best judgment. The assessment order does not indicate that the Assessing Officer have noticed any inconsistency or infirmity in the audit report. On the other hand, the Assessing Officer accepted the report relating to the preceding year. This otherwise shows that the accounts are correct and complete and, situated thus, net profit at the rate of 8 per cent. ought not to have been estimated. The provisions of Section 144 could be invoked in a case where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in Sub-section (1) or accounting standard as notified in Sub-section (2) of Section 145 have not been regularly followed by the assessee. This not having been done by the Assessing Officer in the case at hand, he could not have proceeded to invoke the powers under Section 144. The raw materials were purchased in cash only after obtaining the signatures of the parties without their address. This may lead to adverse presumption. But that is not enough for resorting to the provision of best judgment without any detailed enquiry. The explanation given by the assessee that they had to execute the work in the State of Assam in a disturbed situation and raw materials like stone chips, sand, ballast, stone gravel, stone boulders, bricks, etc., were purchased from different sundry creditors has not been duly considered by the Assessing Officer and the learned Tribunal. Though the learned Tribunal did not notice any serious infirmity in the profit and loss account, yet it applied the doctrine of equity and good conscience in estimating the profit at the rate of 6 per cent, merely on guess. In our considered opinion, on surmises and guess, the learned Tribunal should not have disturbed the finding of the learned CIT (Appeals).
8. A Division Bench of this Court in Aluminium Industries (P) Ltd. v. CIT I.T.R. No. 12 of 1990 observed that a lower rate of gross profit declared by the assessee as compared to the previous year would not in itself be sufficient to justify any addition. The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression. Low profit is neither a circumstance or material to justify addition of profits. We have taken into consideration the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC) : Raghubir Mandal Harikar Mandal v. State of Bihar : State of Kerala v. C. Velukutty : State of Orissa v. Maharaja Shri B.P. Singh Deo : Brij Bhusan Lal Parduman Kumar v. CIT : Chouthmal Agarwalla v. CIT : R.V.S. and Sons Dairy Farm v. CIT : International Forest Co. v. CIT : M. Durai Raj v. CIT : Ramchandra Ramnivas v. State of Orissa [1970] 25 STC 501 (Orissa) : Action Electricals v. Deputy CIT and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217 (Gauhati) relied upon by Mr. Joshi, learned senior Counsel. The ratio that can be culled out from the aforesaid judgments is that the Income-tax Officer is not fettered by any technical rules of evidence and pleadings, and he is entitled to Act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. He must take into consideration local information and repute in regard to the assessee's circumstances, and his own knowledge of previous returns and of other matters necessary to assist him in arriving at a fair and proper estimate. Low profit in a particular year is itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The system of accounting adopted by the assessee cannot be rejected on the ground that the gross profits were low and compared unfavourable with those of others. It is settled law that the tax authorities having relied on one part of the transactions cannot reject the other part. In the instant case, the Assessing Officer adopted the profit and loss account for the preceding year and, yet, borne a doubt about the other part. This appears to be a case of mere suspicion. Without recording a finding that the vouchers in regard to purchase of raw materials have been manipulated or otherwise not acceptable, the Assessing Officer ought not to have gone for best judgment. It is well known that in case of transactions in cash, the purchaser and the seller often do not bother to keep details of their identity. The authorities below were oblivious of the ground realities.
9. We have also considered the judgments in CIT v. British Paints India Ltd. : Chhabildas Tribhuvandas Shah v. CIT and S.N. Vadhyar and Sons v. CIT [1990] 183 ITR 550 (Ker), relied upon by Mr. U. Bhuyan, learned Counsel for the Revenue. The issues decided in these judgments are not based on identical fact. In the instant case, the question is whether the rejection of the books of account by the Assessing Officer and computation of net profit as per best judgment is in tune with the principles of best judgment assessment. In the instant case, as has been pointed out hereinabove, the Assessing Officer abruptly came to a conclusion that the accounts do not disclose correctly the transactions in respect of purchase of raw materials without any enquiry as to whether such materials commensurate with the volume of the works done. Failure of the assessee to give details of the sundry creditors may be a ground for raising suspicion, but suspicion alone is not enough for invoking the powers of best judgment assessment without the support of the materials. The Assessing Officer relied upon a part of a transaction for the preceding year while rejecting the other. This is not permissible in law. Without pointing out any error in the profit and loss account and the audited report, the powers of best judgment assessment could not be invoked. The principles of best judgment assessment do not appear to have been followed by the Assessing Officer. The learned Tribunal reduced the rate of profit from 8 per cent, to 6 per cent. merely on suspicion. In the given circumstances, the question formulated has to be regarded as a question of law.
10. In the result, we allow the appeal and set aside the order dated May 29, 2002, passed by the learned Tribunal. The question of law is accordingly answered in favour of the appellant-assessee and against the Revenue.