Delhi High Court
The Pr. Commissioner Of Income Tax-9 vs Ibilt Technologies Ltd. on 12 September, 2018
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, Chander Shekhar
$~21
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 995/2018
Date of decision : 12th September, 2018
THE PR. COMMISSIONER OF INCOME TAX-9.....Appellant
Through: Mr. Ruchir Bhatia, Advocate
versus
IBILT TECHNOLOGIES LTD. ..... Respondent
Through
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J.(ORAL):
This is a peculiar case where the Assessing Officer had primarily rejected the book results declared by M/s IBILT Technologies Ltd. (respondent-assessee) for the Assessment Year 2007-08 on the ground that there was net loss of Rs.16.41 lacs, compared to net profit of Rs. 1.34 crores in the Assessment Year 2006-07. The explanation given by the respondent-assessee to justify and explain the book results for the Assessment Year 2007-08 were rejected with a simple observation that the explanation was not found to be complete and satisfactory. The Assessing Officer recomputed the taxable income at Rs. 2,13,72,000/- by applying gross profit ratio of 4%.
2. The Commissioner of Income Tax (Appeals) had noted detailed submissions made by the respondent-assessee to explain and elucidate the reason why there was a loss in the said year. For the sake of completeness, we would refer to the said submissions, which have been noted by the Commissioner of Income Tax (Appeals) in tabular form:-
"
S. Observations made by Ld. Our submission Remarks No. AO
1. The assessee was Specific factors which caused loss of Rs. 16,41,966 during Therefore the ITA No.995/2018 Page 1 of 10 specifically asked to A.Y. 2007-08 against the profit of Rs. 1,34,71,291 during surprise explain the reason for fall previous A.Y. 2006-07 contention the in profitability` Ld AO that the The financial year 2006-07 (relevant year for the A.Y. 2007- company shown
08) was very tough year for the company. During this year the profit last year company has achieved a turnover of Rs. 53.43 crores against and loss in the turnover of Rs. 34.36 crores in the immediate preceding current year is year 2005-06 registering a huge growth of 52% over the not justified. previous year. This phenomenal has put pressure on the margins of the company as more infrastructure, working We are relying capital & men power was required to achieve this. However on the follow the company .somehow maintained the operating margins but judgments:
could not prevent losses due to the reasons/factors explained Sh. Pyare Lal here above. A summary of the major factors which caused Mittal V/s ACIT dentin the profitability of the company during the year is (2007) 197 given hereunder: Taxation 186 (Gauhati) Dhakeshwari Cotton Mills V/s.
CIT 26 ITR 775 (SC) Puspanjali Dying & Printing Mills (P) Ltd. 72 TTJ 886 (AHD) Sl Particulars AY 07-08 AY 06-07 Imp Raghubar n act Mandai Harihar o on Mandai VIs State prof of Bihar 8 it STC 770(SC) 1 Other 12,013,931 15,488,789 3,47 income 4,85 Aluminium 8 Industries (P)
2 Depreciation 32,386,450 24,519921 7,86 Ltd.
6,52 V/s CIT GLR
9 216 (GAU)
3 Finance cost 11,337,894 8,648,891 2,68 Calcutta
9,00 Discount Pvt.
3 Ltd.
4 Payment to 14,53,39,49 1293, 9271 3,24, v/s 91 ITR 8
& provision 2 00,2 (SC)
for employee 21
5 Cost of 35,89,83,39 19,94,81,71 15,9
service, 8 0 5,01,
administratio 688
n & selling
expenses
6 Net profit (1,641,966) 13,471,291
From the above table, it is clear that the above factors have caused a huge reduction in profit for the year.
ITA No.995/2018 Page 2 of 10Also we are enclosing comparative chart for the Assessment years 2004-05, 2005-06, 2006-07, 2007-08 & 2008-09 showing net profit & turnover.
Refer Annexure-1 2 The reasons for non The nature of business of the Company and the manner in Therefore disclosure of quantitative which it is carried on by the Company is very peculiar and contention the stock details in tax audit different from other trading or manufacturing Ld AO regarding report for the year under organizations. Most of the purchases of IT equipments, and opening and consideration and non software and license are from reputed OEMs (Original closing stock are existence of closing stock Equipments Manufaturers) and requirement of every client is not correctly & WIP unique since adoption of IT by the client is one time affair and justified.
must take care of its functionality, every purchase is a customized purchases rather than an Off the Self ready item, We are relying therefore as soon as the goods are delivered to the customers on the following revenue is recognized and sales invoices are raised. In this judgments with process purchases and sales both take place at the same time regards to and question of closing stock & WIP does not arise. consistency & continuity Also copies of tax audit reports by the statutory auditors 1. Radha Swami of the company clearly mentioning the non existence of Satsang Vs. stocks are enclosed for the AY 2004-05, 2005-06, 2006-07, CIT. Supreme 2007-08 & 2008-09. Court.100 CTR 267
2. CIT Vs. ARJ Security Prints High Court 183 CTR 323
Ltd High Court 245 ITR 492 Also we are enclosing comparative chart for the above- mentioned Assessment years showing that there is no opening stock, closing stock & WPI. Refer Annexure-1 3 Further on perusal of During the course of the assessment, all the details of Therefore the other income details provision written back along with the nature of these contention of the disclosed by the assessee, provisions written back was filed with the Ld. AO. However Ld AO is it is seen that substantial it is reproduced again for your reference. justified in the amount of Rs.1.13 crores eyes of the law has been shown as The Company Ibilt has acquired an Informatic Divison provisions written back (Division) of the company M/s Crompton Greaves Ltd. with as against the the objective of consolidating similar types of business under corresponding amount of one company effective from 1st July 2005. Sales consideration Rs. 1.46 crores disclosed as agreed between the parties was Rs. 100 lacs. Apart from in the last year. the sale consideration, Ibilt has agreed to take over future liabilities of the Divison towards unexpired warrant and AMC. These future liabilities were valued at Rs. 265 lacs and ITA No.995/2018 Page 3 of 10 a provision for such future liabilities was created in the books of account.
Such a scenario remains In subsequent years, expenses incurred/paid against this incomprehensible as to provision were debited to the provision account since these why this situation would expenses were part of sale consideration. arise in the case of the assessee which is purely As per accounting practices, these expenses should be debited working on order to to respective expenses heads of accounts and corresponding order basis and is stated amount should be transferred from provision account and to by the Assessee himself to be shown as provision written back in the Profit & Loss have nil stock in its books account.
at the end of the financial year. In response to the In nutshell provision written back is an item against which specific query given on expenses have been incurred/paid and debited to profit and this issues the submission loss account and corresponding amount has been transferred made by the assessee was to Provision Written Back account from provision account not found to be complete and subsequently to Profit & Loss Account. and satisfactory. He could not bring on record the The Ld AO was specifically requested vide letter dated exact details of the 07.12.2009 that if anything still is required or to be explained. amounts written back by But the Ld AO kept mum and did not ask anything further. the assessee and the All the details for provision written back was filed with purpose thereof. I am of the Ld. AO at the time of assessment.
the firm view that the
assessee has failed to
bring on record the real However it is again attached herewith you for your kind
facts pertaining to the reference. Refer Annexure-2
matter under
consideration.
4 Assessee was further Foreign travels were made for business purpose and all the Therefore the
asked to file details of details of foreign travel were filed with the Ld.AO along with contention of Ld
foreign travel during the the purpose for which it was made during the course of the AO is justified in
period from 01.04.2006 to assessment. the eyes of the
31.03.2007 along with Law
documentary evidences to The Ld AO was specifically requested vide letter dated
establish the expenses so 07.12.2009 that if anything still is required or to be explained.
incurred was wholly and But the Ld AO kept mum and did not ask anything further.
completely for business
purposes. Details filed by
the assessee were found to However it is again attached herewith you for your kind
be incomplete since the reference. Refer Annexure-3
assessee has no where
mentioned the purposes
for which traveling were
under taken:
5 It is further observed that a) Provision for doubtful advances of Rs. 17,90,884/- The Ld AO was
the assessee has claimed has not been added back to the total income of the assessee as specifically
provision for doubtful it is a ascertained liability as explained below and not requested vide
advances of unascertained liability as mentioned by the Ld. AO. letter dated
Rs.17,90,884/ which has 07.12.2009 that
not been added back to i) This ascertained provision has been made for amount due if anything still
the total income of the from employees (Rs. 429787/-) but not recoverable from is required or to
assessee, since the same them as they have left the organization. Refer Annexure-4 be explained.
represents unasertained But the Ld. AO
ITA No.995/2018 Page 4 of 10
liability. Considering all kept mum and
the above facts discussed This is also an ascertained liability and therefore specific did not ask
above and the provision has been made for it. anything further.
circumstances of the case. It seems that the
I am of the view that the Ld. AO found
assessee has failed in ii) Provision was made for Rs. 1361096.90 in respect of rejection of
disclosing its true and amount due from the different parties but not recoverable books of account
correct income in its from them. Refer. Annexure-4 easier than
return filed in this office. asking any
The assessee has remained All the details for provision for doubtful advances was filed further details
silent throughout the with the Ld.AO at the time of assessment. and explanations.
proceedings for the It seems that Ld.
reasons for a fall in its The Ld AO was specifically requested vide letter dated AO was
profitability as a result of 07.12.2009 that if anything still is required or to be explained. determined to
which the loss return has But the Ld AO kept mum and did not ask anything further. reject the books
been filed. It may further of account and to
be stated that in view of without giving
the fact that assessee proper
enjoys a high profile However it is again attached herewith you for your kind opportunity to
clientless base the reference. the assessee
business can not have since no show
situation of loss in normal cause was given
circumstances. to the assessee to
Further it is again explain "why
incomprehensible as to books of
why assessee is showing accounts should
loss in this year when not be rejected
there was profitability till and assessee's
last year. The assessee has total income
not been able to justify should not
this situation. In view of assessed at 4%
the facts as narrated above of the total
where true and fair picture turnover.
of the assessee's accounts
is not forth coming Therefore, the
provisions of Section 145 contention of the
(3) of the Act are invoked Ld. AO is
and reject the results as justified in the
shown by the assessee and eyes of the Law.
estimate total income of
the assessee on a very
conservative basis at the We are relying
rate of 4% of the total on the follow
turnover which comes to judgments:
Rs.2,13,72,000/-. This
shall take care of the Sh. Pyare Lal
various specific Mittal V/s ACIT
disallowances as (2007) 197
discussed above. The rate Taxation 186
of 4% has been taken as (Gauhati)
the assessee has declared
its NP @ 3.73% in the last Dhakeshwari
year even with a lesser Cotton Mills V/s.
turnover.
ITA No.995/2018 Page 5 of 10
CIT 26 ITR 775
(SC)
Puspanjali Dying
& Printing Mills
(P) Ltd. 72 TTJ
886 (AHD)
Raghubar
Mandal Harihar
Mandal V/s State
of Bihar 8 STC
770 (SC)
Aluminium
Industries (P)
Ltd. V/s CIT
GLR 216 (GAU)
Calcutta
Discount Pvt.
Ltd.V/s 91 ITR 8
(SC)
6 Rejection of books of Therefore the
accounts u/s 145 (3) of the contention of the
Act Ld AO to reject
the book of
accounts and
invoke the
Sec145(3) is not
justified.
S Observations made by Our submission Remarks
NO. Ld. AO
1. The assessee was Therefore the
specifically asked to Specific factors which caused loss of Rs. 16,41,966 during contention the
explain the reason for fall Ld AO that the
A.Y. 2007-08 against the profit of Rs. 1,34,71,291 during in profitability company shown previous A.Y. 2006-07 profit last year and loss in The financial year 2006-07 (relevant year for the A.Y. 2007- current year is
08) was very tough year for the company. During this year the not justified. company has achieved a turnover of Rs. 53.43 crores against the turnover of Rs. 34.36 crores in the immediate preceding year 2005-06 registering a huge growth of 52% over the We are relying previous year. This phenomenal growth has put pressure on on the follow the margins of the company as more infrastructure, working judgments:
capital & men power was required to achieve this. However the company .somehow maintained the operating margins but Sh. Pyare Lal could not prevent losses due to the reasons/factors explained Mittal V/s ACIT here above. A summary of the major factors which caused (2007) 197 ITA No.995/2018 Page 6 of 10 dentin the profitability of the company during the year is Taxation 186 given hereunder: (Gauhati) Dhakeshwari Sl Particulars AY 07-08 AY 06-07 Impact on Cotton Mills V/s.
n profit CIT 26 ITR 775
o (SC)
1 Other 12,013,93 15,488,78 3,474,858
income 1 9 Puspanjali Dying
2 Depreciatio 32,386,45 24,519921 7,866,529 & Printing Mills
n 0 (P) Ltd. 72 TTJ
3 Finance 11,337,89 8,648,891 2,689,003 886 (AHD)
cost 4
4 Payment to 14,53,39,4 1293, 3,24,00,22 Raghubar
& provision 92 9271 1 Mandal Harihar
for Mandal V/s State
employee of Bihar 8 STC
5 Cost of 35,89,83,3 19,94,81,7 15,95,01,6 770 (SC)
service, 98 10 88
administrati
on Aluminium
6 Net profit (1,641,966 13,471,29 Industries (P)
) 1 Ltd. V/s CIT
GLR 216 (GAU)
Calcutta
From the above table, it is clear that the above factors have Discount Pvt.
caused a huge reduction in profit for the year. Ltd, V/s 91 ITR 8 (SC) Also we are enclosing comparative chart for the Assessment years 2004-05, 2005-06, 2006-07, 2007-08 & 2008-09 showing net profit & turnover.
Refer Annexure-1 "
3. It is not disputed and challenged that the respondent-assessee was engaged in supplying computer equipment, networking equipment and computer software on turnkey basis, primarily to government department/bodies and government companies. They were also providing warranty, annual maintenance contract and facility management services for up to five years. The contracts awarded to them ITA No.995/2018 Page 7 of 10 were on tender basis. Further, the respondent-assessee was purchasing equipments from reputed original equipment manufacturers (OEMs) like IBM, HP, ORACLE, Cisco, Dlink, Dax, Redhat, Acer, Sun etc. The assessment order states that there was exponential increase in the turnover from Rs.34.36 crore in the last year to Rs.53.43 crore in the current year, and the respondent-assessee had explained that to meet the commitments, they had recruited employees. The respondent-assessee had produced books of accounts including cash book and ledgers, going into nine volumes along with the vouchers. To justify and explain drop and decrease in operating profits the respondent-assessee had produced and furnished details as is apparent from the chart/table quoted above.
4. Learned counsel for the Revenue states that the respondent-assessee had not declared any opening and closing stock. He relies on the assessment order. However, the Assessing Officer did not examine and deal with the contention and plea raised by the respondent-assessee, duly taken into consideration by the Commission of Income Tax (Appeals), that supply orders were directly placed with the OEM, who had then made the supplies to the customers. Accordingly, the respondent-assessee did not keep or maintain stock-in-hand. In this manner, the respondent-assessee had cut down on their inventory costs, to ensure better profitability.
5. The Assessing Officer should have verified and examined the details of the purchases made and the supplies made, ascertaining whether or not there was any lapse in not declaring opening and closing stock. The books of accounts could not have been rejected on the ground that no opening or closing stock was declared, without the said exercise being undertaken.
6. The other reason given by the Assessing Officer to reject the books of accounts and make best judgment assessment was that the respondent-assessee had written back substantial amount of Rs.1.13 crore and had also claimed ITA No.995/2018 Page 8 of 10 provision for doubtful advances of Rs.17,90,884/-. The respondent-assessee had explained that they had acquired informatic division from M/s Crompton Greaves Ltd., with the objective of consolidating similar types of business under one company effective from 1.7.2005. As per terms, the respondent-assessee had agreed to take over future liability of the division towards unexpired warranty and the AMC. Clearly, the Assessing Officer did not consider the submission made and had failed to deliberate upon explanation given by respondent-assessee. With regard to the amounts written back, it was stated that these were expenses which had been incurred or paid and accordingly debited to the profit and loss account. Reference could made to the chart/table reproduced above from the order of the Commissioner of Income Tax (Appeals).
7. Section 145 (2) of the Act empowers the Assessing Officer to make best judgment assessment when he is not satisfied with correctness or completeness of the accounts of the assessee. Best judgment assessment in terms of Section 145 can also be framed when no method of accounting has been regularly followed or where the method employed is such that the income, profit and gains cannot be properly deduced therefrom.
8. Books of accounts were not rejected by the assessing Officer as unreliable on the ground that transactions were omitted, proper particulars and vouchers were not forthcoming or there were inherent lacunas and other defects. The two/three feeble reasons given by the Assessing Officer for rejecting the book results have not been accepted by the appellate authorities. Reasons and explanation given by the respondent-assessee regarding opening/closing stock, amount written back etc. have been accepted. It is not the case that the method of accounting deployed was not regularly followed or it was not possible to deduce profit and gains from the method deployed. The Assessment Order is silent and ITA No.995/2018 Page 9 of 10 does not comment and state that the books of accounts were incomplete, incorrect or unreliable.
9. If there is fall in the gross profit ratio, reasons and grounds given by the respondent/assessee have to be examined objectively, fairly and in a non-partisan manner. Past results could be a good reason to conduct detailed verification, albeit would not be the only ground and reason to make addition by rejecting the books of accounts. Good and cogent reason why the financial results should be rejected has to be given. Books of accounts cannot be rejected as the respondent- assessee has suffered losses, where as in the immediate earlier year profit was made. Fall in gross profit ratio could be due to various reasons, and cannot be the sole and only ground to reject the book results in entirety and frame best judgment assessment [see Commissioner of Income Tax-XII v. Poonam Rani (2010) 326 ITR 223, Action Electricals v. Deputy Commissioner of Income Tax (2003) 180 CTR 62]. The reasoning given in the assessment order to compute income on hypothetical basis by applying gross profit ratio of 4% is completely fallacious, wrong and is contrary to well-settled law, as expounded vide judgments reported as Commissioner of Income Tax, West Bengal v.
Calcutta Discount Co. Ltd., (1974) 3 SCC 260, Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal, (1954) 26 ITR 775 (SC) and Raghubar Mandal Harihar Mandal v. State of Bihar, AIR 1957 SC 810.
10. The present appeal has no merit and the same is dismissed in limine.
SANJIV KHANNA, J CHANDER SHEKHAR, J SEPTEMBER 12, 2018/tp ITA No.995/2018 Page 10 of 10