Income Tax Appellate Tribunal - Amritsar
Measeg Raja & Company, Srinagar vs Income Tax Officer Ward 3(5), Baramula on 16 March, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH, AMRITSAR
BEFORE SH. N.K. CHOUDHRY, JUDICIAL MEMBER AND
SH. ANADEE NATH MISSHRA, ACCOUNTANT MEMBER
I.T.A. No. 27(Asr)/2018
Assessment Year: 2013-14
M/s Raja & Co., Vs. Income Tax Officer,
Pahli Pora, Uri, Ward-3(5), Baramulla
Baramulla
[PAN: AAEFR 9964N]
(Appellant) (Respondent)
Appellant by: None
Respondent by: Sh. Charan Dass (Ld. D.R.)
Date of hearing: 16.03.2020
Date of pronouncement: 16.03.2020
CONSEQUENTIAL ORDER
PER N.K.CHOUDHARY, JM:
While disposing of the appeal of the assessee, the Hon'ble Judicial Member and the Hon'ble Accountant Member have taken the divergent views vide their separate orders dated 04.12.2018 and 31.01.2019 respectively, which resulted into reference u/s 255(4) of the Income Tax Act, 1961 (hereinafter called as the 'Act'). Consequently the Hon'ble third Member vide its order dated 09.01.2020 concurred with the view of the Hon'ble Judicial Member by concluding as under:
"23.3 In the present case, the A.O. also alleged that the Net Profit Rate declared by the assessee at 0.69% was negligible. To 2 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) rebut the said allegation the assessee furnished the details of the Net Profit Rate as under:
Assessment Year NP Ratio (after Assessed U/s
interest on capital and
salary to partners.)
2014-15 0.94% 143(1)
2013-14 0.75% 143(3)
2012-13 0.50% 143(3)
2011-12 0.40% 143(1)
2010-11 0.11% 143(1)
24. From the aforesaid details, it is clear that the Net Profit Rate was progressive and it was not consistent for all the years and when the A.O. accepted the NPR of 0.50% for the preceding Assessment Year 2012-13 while framing the scrutiny assessment under section 143(3) of the Act, this allegation that the assessee had shown negligible Net Profit Rate after interest on capital and salary to the partners was also not sufficient to reject the books of accounts of the assessee particularly when the Net Profit Rate shown after claiming the interest on capital and salary to the Partners for the year under consideration was better than the preceding years. In the present case the A.O. alleged that the assessee had claimed labour wages to the tune of Rs. 57,96,521/- against the gross receipt but no muster roll was furnished and that it had not appeared possible that such large man power / labour had been arranged without a service of mate and that the payments made were covered under section 194C of the Act. However, no specific instance was brought on record to substantiate that the assessee was required to deduct the TDS on a particular payment of the labour, therefore the reasons given by the A.O. for rejecting the books of accounts were not sufficient particularly when the assessee had declared progressive Gross Profit Rate as well as 3 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) Net Profit Rate in comparison to the earlier years and the A.O. himself considered the difference of gross receipts taken by him and disclosed by the assessee, as the receipts and applied Gross Profit Rate of 15% on the said receipts even when the assessee had already disclosed those receipt in its books of accounts.
25. Therefore by considering the totality of the facts as discussed hereinabove, I am of the view that the Ld. Judicial Member has taken a possible view in holding that the A.O. was not justified in rejecting the books of account, and since the rejection of books of accounts by the A.O. has been held to be unjustified the trading addition amounting to Rs. 97,92,990/- made by applying the Net Profit Rate of 8% was not justified when the Net Profit Rate declared by the assessee was better than the Net Profit Rate of earlier years which had been accepted by the department.
26. Similarly the addition of Rs. 45,40,497/- by applying the Net Profit Rate of 15% on the receipt and other income amounting to Rs. 2,82,39,322/- and Rs. 20,30,658/- respectively was also not justified when the assessee had already shown those receipts in its books of account and offered for taxation. Similarly the estimated addition of Rs. 9,00,000/- on account of interest on the FDR of Rs. 1,00,00,000/- was not justified when the assessee itself had already disclosed the accrued interest of Rs. 5,10,000/- and included the same in the other income of Rs. 20,30,658/-. Therefore this addition on presumption basis also deserves to be deleted.
27. In view of the aforesaid discussion I concur with the view of the Ld. Judicial Member. Now this appeal would be placed before the regular Bench for giving effect to the opinion of the majority."4 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
2. As per majority view the impugned order dated 28.11.2017 passed by the Ld. CIT(A) u/s 250(6) of the Act is liable to be set aside. Consequently the appeal of the assessee stands allowed.
Order pronounced in the open Court on 16.03.2020.
Sd/- Sd/-
(ANADEE NATH MISSHRA) (N. K. CHOUDHRY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 16.03.2020
/GP/Sr. Ps.
Copy of the order forwarded to:
1. The Appellants
2. The Respondent
3. The CIT
4. Then CIT(Appeals)
5. SR DR, I.T.A.T. Amritsar
6. Guard File
True Copy
By Order
5 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
IN THE INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH, AMRITSAR BEFORE: SHRI. N.K.SAINI, VICE PRESIDENT (THIRD MEMBER) ITA Nos.27/ASR/2018 Assessment Year : 2013-14 M/s Raja & Co. Vs The ITO Pahli Pora, Uri, Baramulla Ward 3(5) Baramulla PAN NO: AAEFR9964N Appellant Respondent Assessee by : M.A.Mir, Cost Accountant Revenue by : Shri Charan Dass, Sr. DR Date of Hearing : 14/10/2019 Date of Pronouncement : 09/01/2020 आदे श/Order PER N.K. SAINI, VICE PRESIDENT On account of difference of opinion in between the Ld. Accountant Member and Ld. Judicial Member of the ITAT, Amritsar Bench, this matter has been referred to me by the Hon'ble President ITAT for consideration and disposal under section 255(4) of the Income Tax Act, 1961 (hereinafter referred to as 'Act'). It may be noted that even while framing the point of difference there was a difference of opinion and different questions have been framed by both the Ld. Members. Hon'ble Judicial Member formulated the following questions:
" Whether the Ld. CIT(A) erred in law and facts in affirming the rejection of books of account u/s 145(3) by the Assessing Officer ?"6 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
2. On the other hand the Ld. Accountant Member formulated the following questions while referring the matter to the Hon'ble President.
" Whether the books of account of the assessee firm are correct and complete, reflecting the true and correct income of its business for the relevant years, or is the same liable to be determined in accordance with S. 145(3) of the Income Tax Act, 1961?
3. From the aforesaid questions referred by both the Ld. Members it would be clear that the only issue to be adjudicated relates to the determination of the business income in accordance with the books of account or by rejecting the books of account under section 145(3) of the Act. Although the facts has been narrated by both the Ld. Members in their respective orders, for the clarity it is necessary to discuss the facts in brief as mentioned by the A.O. in the assessment order dt. 31/03/2016.
4. The facts in brief are that the assessee electronically filed its return of income on 30/09/2013 by declaring the income of Rs. 11,30,820/-, subsequently the case was selected for scrutiny. The assessee is a partnership firm having Head Office at Uri and branch office at Rawalpora Housing Colony, Srinagar and was deriving its income from execution of civil contract works allotted to it by AFCONS Infrastructure Ltd., Flood Control Division and PMGSY departments of J&K Government. The contract works had been executed at different places in Udhampur, Samba and Baramulla areas. The gross contract receipt declared by the assessee was at Rs. 16,04,33,627/- besides the other income of Rs. 20,30,658/- which had been credited in the P&L account. The assessee had shown Net Profit of Rs. 11,30,820/- i.e. @ 0.69% after allowing deduction on account of salary and interest to the partners and the Net Profit 7 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) Rate before the said deductions was at 1.83% . The assesse had executed heavy work contract in J&K regions at separate and distant places from Srinagar.
5. The A.O. required the assessee to produce the Site/Project wise books of accounts and other subsidiary records. The Assessee admitted to have not maintained such separate books of accounts. The A.O. also required the assessee to give the details of the contract receipt and identify the same from the books of accounts in view of the mismatch observed vis a vis the details in Form 26AS and Form No. 16A. The assessee submitted that the receipts were properly reflected in Form No. 26AS. The A.O. however observed that the assessee had not mentioned proper details and was not sure of the nature and party in respect of the contract receipts shown in its books of accounts. The A.O. pointed out that the assessee had shown gross contract receipt to the tune of Rs 16,04,33,627/- whereas the same came to Rs. 11,90,19,320/- as per the Form No. 26AS. The assessee gave the details of the total contract receipt as under:
Allotting Gross Amount %age of Bill raised WIP & Authority Contract received completed but not material amount during the work competed at Site F.Y. AFCONS 62133353/- 4618840/- 3.04 Nil Nil Infrastructure Ltd.
Flood Control 93600000/- 6804750/- 4.48 323370 Nil
Dept.
PMGSY 103148023 6548510/- 4.31 Nil Nil
8 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
5.1 The A.O. observed that the details of the contract receipt
shown were not reconciling, he therefore asked the assessee to give the project wise details. In response the assessee submitted as under:
Flood Control Division Rs. 29663028/- PMGSY Rs. 52609033/- AFCONS Rs. 78161566/- 5.2 The A.O. pointed out that the confirmations of the receipt &
TDS thereon were called from the respective department and it was found that payments from flood control division was at Rs. 66,413,499/- and also there had been a mismatch of figures on receipts from AFCONS as reported in books or details furnished and as confirmed by AFCONS.
5.3 The A.O. further observed that the assessee in its account had credited amounts at different time under the Head Misc. Income.
He therefore asked the assessee to provide the details of the such credits / receipts. The assessee submitted that the same represented sale of scrap /left out material and interest income.
5.4 The A.O. observed that the assessee had not furnished any reasonable details or documentary evidence to verify the nature and source of these heavy credits in its bank account / books and failure to establish the nature of being contract receipts or otherwise of those credits could not be verified due to assessee's failure and therefore gave strong reason to believe that the same represented the receipts from undisclosed sources.
5.5 The A.O. also observed that the assessee did not produce proper and complete books of accounts or supporting vouchers in 9 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) respect of the various contracts executed at distant places across the State, besides some other discrepancies were noticed on examination of the details / account books produced which were clearly suggesting the incompleteness of the books of accounts. He therefore asked the assessee to explain as to why the trading / book version shown in the return be not rejected after invoking the provisions of 145(3) of the Act, and the income to be determined at a higher profit rate as considered reasonable in the contract cases. The A.O. issued the letter dt. 29/02/2016 to the assessee, the relevant portion of which read as under:
1. You have claimed heavy contract receipts and TDS thereon which are not fully reflected in the F.No 26AS.Time and again you were requested to furnish date wise and contracting department/company wise details of the contract receipts and TDS thereon. In your replies so far, you have given varying explanations. First you relied upon the 26AS but that is matching. In one of your replies dated 15.9.15 you stated the total receipts during the year at Rs. 1797200/ only. Later one more chart of the details were given which are also not reconcile e,g. the receipts from Flood control Department shown at Rs. 29663028/ when same have been confirmed at Rs. 66413499/. Your failure to furnish date wise and contract wise details of the receipts despite giving reasonable time clearly suggest that such details are not available with you and points towards the incompleteness of the books of accounts maintained and relied in the return of income.
2. Till date you have not furnished details regarding the nature and sites of the contracts executed . Since it appears that the works have been executed in remote and distant areas like Uri, Samba and Udhampur areas, it is clear that site wise and project /contract wise accounts were required to be maintained. No project /contract wise details and account books have been produced so far despite specific request for the same. It appear from the failure to furnish such Project wise books of accounts and other subsidiary records that such accounts have not been maintained and this cast doubt on the correctness of the final trading results declared.
3. Till date complete payment vouchers in respect of the expenses have not been produced . in absence of the supporting documentary evidence for the expenses claimed against the gross receipts to show profits at a meager NP rate of 0.69%,the correctness and genuineness of the expenses claimed is not 10 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) verifiable and provides another ground for incompleteness of the book version .
4. No Work in progress or bills receivable have been shown in the accounts .In view of the large scale contract works that too at various sites Including in summer zone Udhampur and Samba, there is a strong possibility of such work in progess or material at site which has not been shown. Further some bills presented but not cleared till 31.3.2013 cannot be ruled out but no such bills receivable shown.
5. You have shown bank account No. 1154 in the return. In your replies you have not claimed any such account. You claimed only four bank accounts but when later confronted, you admitted another bank account with State Cooperative Bank not earlier admitted. No ledger account of this uccount provided and apparently the account was not accounted for which clearly point towards incompleteness of the books of account maintained and relied upon.
6. For a pretty long time you denied to have any FDR but later when confronted, you admitted to have a bank FDR ,however no details provided about it, which clearly suggests the incompleteness of the accounts.
7. You have credited Rs.2030658/- in the P&L Account. No specific details in this regard provided despite repeated requests and is stated as sale of scrap etc. The failure to give details in this regard means that relevant details are not available and thus question the completeness of the accounts.
8. Besides above, it is noticed that you have either failed to deduct tax at source or deducted it partly in respect of the following payments attracting TDS provisions;
i) Commission No TDS made ii) Hire charges Only TDS 1% is stated to have been made
although relevant details of the date wise payments and TDS thereon not provided.
iii) Wages and labour- In view of the large scale contracts at various places, the engagement of labour mat is not ruled out especially no muster rolls of the labour used not provided despite specific requests.
iv) Relevant details of deductees with their PANs and e-TDS returns in respect of TDS made on payments to sub contractors also not provided for verifying the correct compliance to the TDS provisions.
v) In heavy claim of salaries, payment of salary to engineers attracting TDS, cannot be ruled out but same is not ascertainable for want of relevant details not provided so far.
11 ITA No. 27/Asr/2018(Asst. Year: 2013-14)
9. Copies of Two partnership deeds have been produced .As per PS.deed dated 1.4.2006 there are only 4 partners , as per supplementary PS deed there are 9 partners and one Zuhaib Tanveer khan, is retiring. There is no evidence of adding more partners or any justification for claiming interest and salary paid to the retiring partner from your side.
From the above discrepancies and observation, I am of the opinion that the books of accounts maintained do not present a clear picture of your income and are not reliable. Accordingly the trading /book version shown in the return of income on the basis of such incomplete books of accounts is liable for rejections. Accordingly for the above reasons and discrepancies, it is proposed to reject your book version by invoking the provisions of section 145(3) of the Income tax Act,1961 and assess your income by applying a higher Net profit rate as has been considered reasonable in contractor cases by many appellate authorities. However, before proceeding to complete your assessment for the assessment year under consideration in the manner provided u/s 145(3)/144, you are requested to furnish your explanation duly supported by the documentary evidence and records.
5.6 In response the assessee furnished the written reply which was received by the A.O. on 18/03/2016, in the meanwhile the assessee made an application under section 144A of the Act to the Additional CIT Range-3, Srinagar who directed the A.O. vide order no. 921 dt. 28/03/2016 as under:
"Assessment has to be framed by A.O taking into consideration the income and expenditure returned by the assessee , so assessee cannot claim particular rate of net profit be applied to its case . However taking into consideration all the facts and figures of the case , A.O may also consider the rates of income offered by assessee as above."
5.7 The A.O. after considering the submissions of the Assessee and the direction given by the Addl. CIT observed as under:
i. That the assessee has not maintained proper records in respect of the gross contract receipts and has not been able to give correct amount received from the respective contracting departments .
ii. That the assessee has not been able to explain the nature and source of large receipts introduced in the books as 12 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) miscellaneous income and clubbed the same with the contract receipts.
iii. That the assessee has not maintained project wise, site wise books of accounts and subsidiary records which was required to be maintained in view of the distant site of operation at Udhampur , Samba and Uri and it was not practically possible to maintain single set' of books of accounts for such contract works in different topographical regions at single places accounting of the financial affairs .
iv. That the assessee did not produce complete vouchers in support of the large expenses booked against the gross receipts to justify the negligible net profit rate of 0.69% declared .
v. That the assessee has not shown any work in progress or bills receivables at the various sites of operation /contracts when it has admitted the single digit percentage of completion of the contract allotted.
vi. That the assessee for a pretty long time admitted only one bank account bearing Number 1154 and the details of bank accounts with state cooperative bank was not provided to avoid enquiry about its credits.
vii. That in many replies the assessee did not admitted any FDR and it was only when confronted on the issue admitted that an FDR of Rs 1 crore and claimed to have shown the same as loan , advances and deposits in the balance sheet, however no relevant details of the purchase date , the interest earned etc have been produced.
viii. The assessee has claimed labour & wages to the tune of Rs 5796521/- against the gross receipts and no details like muster rolls have been produced to justify the such large claim. Further in view of the large claim it does not appear possible that such large manpower/labourers have been arranged without the services of Mate and thus the payments made are covered under 194C of the Income Tax Act,1961.
ix. That on perusal of the details/records it has been noticed that assessee has also erred proper compliance of TDS provisions as has been confronted to it vide the letter dated 29.02.2016.
x. That the assessee has also been found claiming salary to even some retired partners which was duly confronted to the assessee vide letter dated 29.02.2016 .
5.8 In view of the aforesaid observations, the A.O. was of the view that the books of accounts maintained / produced by the 13 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) assessee were not complete and those did not give a true picture of the profits, therefore trading / book result of the assessee were not reliable and liable for rejection. Accordingly the A.O. invoked the provisions of Section 145(3) of the Act and the book version of the assessee was rejected. The A.O. observed that the Net Profit Rate of 10% had been considered a reasonable Net Profit Rate in the case of contractors by various appellate authorities. At the same time he observed that although Net Profit Rate of 10% was considered to be reasonable in contractor cases, however, after considering the submissions of the assessee and the nature of civil contract works, it would be fair and just if a Net Profit Rate of 8% was to be applied on the gross contract receipt to estimate and assess the income of the assessee from contract business. The A.O. on the basis of the informations called for, under section 133(6) of the Act found that the assessee had received gross contract receipt of Rs.
13,65,47,363/- from the following parties:
Name of the Party Amount TDS PMGSY Rs. 20211620/- Rs. 795779/- Flood Control Deptt/Baramulla Rs. 32527923/- Rs. 699162/- Flood Control Deptt/Samba Rs. 33885576/- Rs. 769204/- AFCONS Rs. 49922244/- Rs. 998450/- Total Rs. 13,65,47,363/- Rs. 32,62,595/-
The A.O. considered the above said contract receipts of Rs. 13,65,47,363/- as against Rs. 16,24,64,285/- shown by the assessee and by applying the Net Profit Rate of 8% determined the income at Rs. 1,09,23,810/- as against Rs. 11,30,820/- shown by the assessee thereby resulting in addition of Rs. 97,92,990/-. The A.O. also observed that the assessee had shown other income of Rs. 20,30,658/-, however the nature and source of receipt / deposits/credits in the banks/books of accounts was not clear due to the failure of assessee to furnish the relevant details.
14 ITA No. 27/Asr/2018(Asst. Year: 2013-14) The A.O. also observed that the assessee had shown total contract receipt at Rs. 16,47,86,685/- whereas the same had been confirmed at Rs. 13,65,47,363/- thereby in excess by Rs. 2,82,39,322/-. According to the A.O the said excessive receipts were apparently either unexplained cash credit or receipts from some unknown and undisclosed source of income, he, therefore treated the other receipts of the assessee at Rs. 3,02,69,980/- (Rs. 28239322 + Rs 2030658). The A.O. opined that the assessee would have reasonably earned profit @ 15% on the aforesaid receipts. He therefore by applying the Net Profit Rate of 15% on the said receipts determined the income at Rs. 45,40,497/-. The A.O. also observed that the assessee was having FDR for Rs. 1,00,00,000/- the details of which were not given and nor the details of interest accrued / earned accounted for in the books of accounts were furnished. He therefore by taking into consideration the prevailing open market interest of 9%, estimated the income at Rs. 9,00,000/-. Accordingly the total taxable income was determined at Rs. 16364310/- instead of Rs. 11,30,820/- shown by the assessee.
6. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and challenged the rejection of books of accounts. It was submitted before the Ld. CIT(A), that the assessee had accounted for more contract receipts than contract payment disclosed in form no. 26AS. It was further submitted that the assessee earned income to the tune of Rs. 20,30,658/- on account of sale of scrap and bank interest and that the reply was furnished to the show cause notice seeking rejection of books of accounts, by speed post which was received by the A.O. on 18/03/2016 and placed on record. It was 15 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) stated that the A.O. did not contravene the submissions made by the assessee.
6.1 The Ld. CIT(A) after considering the submissions of the assessee and the assessment order passed by the A.O, observed that despite sufficient opportunity the assessee did not produce proper and complete books of accounts or separate vouchers in respect of various contract executed at different places at J&K and that complete payment vouchers of various expenses were not produced, therefore the genuineness of the various expenses claimed in P&L Account, remained unverified. He also observed that no work in progress or bill receivable had been shown in the account by the assessee and that the assessee had claimed only four bank account in its books of account but when later confronted the assessee admitted another bank account with State Cooperative Bank but no ledger account of this account was provided which shows that bank accounts were incomplete / incorrect. He also observed that the assessee initially denied having any FDR but later admitted to have bank FDR of Rs. 1,00,00,000/- whose details were not provided suggesting incompleteness of the account. The Ld. CIT(A) also observed that the assessee had either failed to deduct TDS or deducted it partly in various payments attracting TDS provisions as enumerated in the assessment order. It was pointed out that no muster rolls of labour used and the vouchers were produced before the A.O. therefore the claim of labour expenses remained unverified.
6.2 Ld. CIT(A) in view of the above said observation held that the books of accounts were not properly maintained, those were 16 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) incomplete and incorrect, therefore the rejection of books of accounts under section 145(3) of the Act was justified.
6.3. As regards to the application of Net Profit Rate of 8%, Ld. CIT(A) observed that the A.O. issued notice under section 133(6) of the Act to some contractees of the assessee who confirmed total contracts payments of Rs. 13,65,47,363/- only and that the Net Profit Rate of 8% on the verified contract receipt of Rs. 13,65,47,363/- was very fair and reasonable which was supported by various decisions of the ITAT, Amritsar & Chandigarh Benches where in the Net Profit Rate of 8% on the gross contract receipt was upheld. He therefore upheld the addition of Rs. 97,92,990/-.
6.4. As regards to the addition of Rs. 45,40,497/- on account of unexplained cash credit or receipts is concerned, the Ld. CIT(A) observed that action of the A.O. in estimating the Net Profit on the unverified book receipt of Rs. 3,02,69,980/- by applying Net Profit Rate was justified in principle, however, he was of the view that the A.O. had applied too high Net Profit Rate of 15% without any basis where as the Net Profit Rate of 8% was applied on the verified gross receipt. He therefore reduced the Net Profit Rate of 15% to 8% on the above said contract receipt of Rs. 3,02,69,980/-.
6.5. As regards to the addition of Rs. 9,00,000/- on account of interest income the assessee submitted before the Ld. CIT(A) that the A.O. in para 8 of the assessment order had himself agreed that the interest income accrued on FDR was included in the other income disclosed in the P&L Account and that the FDR amount was disclosed in the Balance Sheet. It was submitted that the assessee accounted for the interest income earned on the FDR and the fact 17 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) was communicated to the A.O. who still made the addition. The Ld. CIT(A) after considering the submissions of the assessee observed that no such details about the accounting of FDR amounting to Rs. 1,00,00,000/- in the books of accounts and accounting for the interest credited thereon was provided by the assessee either before the A.O. or before him. He therefore sustained the addition of Rs. 9,00,000/- also.
7. Being aggrieved the assessee carried the matter in second appeal to the ITAT Amritsar Bench, wherein both the Ld. Members deferred on their views. The Ld. Judicial Member held that the assesse had replied each and every query raised by the A.O. and also submitted relevant documents in support of its contention which clearly reflected that the assessee had replied each and every objection of the A.O. with substantive evidence therefore in cumulative effect there was no reason for affirming the rejection of books of accounts.
8. As regards to the addition of Rs. 45,40,497/- on account of profit on turnover of Rs. 3,02,69,980/- by applying the net profit rate of 8%. The Ld. Judicial Member deleted this addition since the rejection of books of accounts was set aside. The another addition of Rs. 9,00,000/- on account of accrued interest on FDR was also deleted by observing that the assessee had properly communicated to the A.O. that the FDR as well as accumulated interest had been disclosed.
9. In his dissenting order, the Ld. Accountant Member observed that the contract receipts for the year were from only three contractees who had allowed the credit to the assessee during the 18 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) year at an aggregate of Rs. 1365.47 Lacs on which tax was deducted at source and merely because the disclosed turnover (receipt) was higher would not absolve the assessee from its obligation in law to explain the balance credit appearing in its books for the year. At the same time he observed that even the bills to that extent raised by the assessee during the year were cleared by those parties. Though those were accounted for by the assessee as income in that case the difference would stand to be explained with reference to the account statement of these three parties and the corresponding bills. He also observed that the difference may also represent the contract work of an earlier years accounted for by the assessee in the current year i.e; on credit being allowed to it by concerned contractees or otherwise. He further observed that the assessee had not at any stage offerred to reconcile the difference or otherwise show it to be contract receipt. Therefore the receipts which the assessee accounted for the year were not correct and complete. He also observed that there was no work in progress, in any of the project under progress, both as at the beginning and the end of the year was difficult to understand and in the absence of any stock record it was difficult to verify the asessee's claim of nil closing stock of any raw material and work in progress at the year end.
10. Ld. Accountant Member observed that there was no requirement in law for maintaining project wise accounts, the same was borne out by the need to properly accounted for the direct expenditure, as well as revenues, of such project. He accordingly held that it was a fit case for rejection of account. The Ld. Accountant Member held that the rejection of books by the A.O. as 19 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) the same were not correct and complete thus not reliable for deducing correct income there from, was based on a number of deficiencies which were sufficient to endorse and upheld the application of Section 145(3) of the Act.
11. The Ld. Accountant Member on the issue relating to the application of Net Profit Rate, on the miscellaneous income of Rs. 20.31 Lacs stated to be scrap sale and interest observed that how could a profit rate be applied on those receipts as done firstly by the A.O. who was not sure of the nature of the receipts and then by the Ld. CIT(A) who apparently treated the same as a part of the contract receipt.
12. As regards to the addition of Rs. 9,00,000/- towards interest on FDR, the Ld. Accountant Member observed that the assessee had claimed to have accounted interest of Rs. 5.10 lacs and the breakup of income of Rs. 20,30,658/- have been furnished in the assessment proceedings. He directed the A.O. to verify the said fact and not to make separate addition.
13. As there was difference of opinion in between the Ld. Members, the Hon'ble President nominated me under section 255(4) of the Act as Third Member to resolve the controversy.
14. Ld. Counsel for the assessee reiterated the submissions made at the time of hearing in the regular Bench and further submitted that the A.O. rejected the books of accounts for the following reasons:
1 More contract receipts accounted for by the appellant than contract payments disclosed by form 26AS.
2 Non-maintenance of project wise books of accounts. 3 Non provision of vouchers.
4 Guessing that the appellant must be having WIP.20 ITA No. 27/Asr/2018
(Asst. Year: 2013-14) 5 Non provision of Bank Statement 6 FDR accounted for but details as per the will of the Ld AO not provided.
7 You have credited Rs. 20,30,658/- in P&L account. No specific details in this regard provided.
8 Alleged that the appellant either failed to deduct tax at source or deducted partly.
9 Provision of supplementary partnership deed.
He countered each of the above reasons and submitted in writing as under:
"The assessee has shown higher receipts than stated in 26AS it is because of the fact the most of the Government agencies were not filling TDS return in time that is why the same was not getting reflected in 26AS. But reflecting proper business receipts than 26AS is not an irregularity which could warrant invoking of section 145(3) of the Income Tax Act 1961.I may invite kind attention of Honors towards para 1 of page 39 of the paper book where it has been well explained to the Ld. A.O vide reply. If gross receipts are more then it can not be reason for rejection of books of accounts. However if the assessing officer could not verify the same then he should have to simply make the addition and tax accordingly. The Ld. Assessing officer estimates this income other than contract income and applies net profit rate of 15% and not doubting direct expenses like material, sub Contract Expenses, Service Tax and Labour. Since the assessing officer has estimated income of 15% on receipts of Rs. 3,02,69,980/- and said amount if taken out of the trading account result a loss of 3,02,69,980/- and it is therefore not understandable what treatment he provided for the direct expenses incurred in the trading account. The Ld. Assessing officer considered Rs. 3,02,69,980/- as a separate business other than contract business and estimated profit percentage of 15% which finally Ld. CIT(A) reduced to 8%. If this is a separate business then what about expense like Material, Labour, Sub Contract etc. which he has not disputed. He has disputed the Credit side, Gross receipts, but what about debit side which has been incurred for execution of contracts and earning of said receipts. Therefore this can not form basis for rejection of books of accounts.
Is this just the instance he wanted to estimate income and that too at a very higher side by ignoring assesse's books, audit report, subsidiary information and explanation etc. Actually he has not rejected books of accounts but simply ignored books for the sake of estimation of income at a higher side.
Making this as ground for rejection is absolutely hypothetical and therefore unjustified.21 ITA No. 27/Asr/2018
(Asst. Year: 2013-14) 2 Non-maintenance of project wise books of accounts. The Assesee has maintained proper books of accounts as reguired by law which were examined by the auditors. It is not understandable why the Ld. Assessing officer suggests maintenance of separate books of accounts for projects. I may invite kind attention of Honors towards para 2 of page 39 of the paper book where it has been well explained to the Ld. A.O vide reply. Generally accepted books of accounts are Cash Book, Ledger, Bank Book/Bank Accounts and Stock registers. It is upto the assessee how he maintains books of accounts from where balance are taken for preparation of financial statements. The appellant has been maintaining above books of accounts regularly and in the past book results are accepted 3 Non provision of vouchers.
The assessing officer has hypothetically stated that till date complete vouchers have not been produced. In respect of supporting documentary evidences for expenses claimed against the gross receipts to show profits at a meager N.P rate, the genuineness of expense claimed is not verifiable and provides another ground for incompleteness of book version. It is not understandable which vouchers have not been produced. The allegation is hypothetical and guess. The Ld. Assessing officer was supposed to identify the expenses for which vouchers have not been produced which has not done so. In absence of any such reason how the allegation made by the Ld. A.O is justified. The allegation is baseless and not sustainable. Further let us assume for argument sake the vouchers are not produced then it can warrant addition therefore how non production of vouchers can form basis for rejection of books of accounts. Secondly justification has been provided during the course of assessment proceedings vide reply attached stated at para 3 of page 39 of the paper book.
4 Guessing that the appellant must be having WIP.
"No WIP or bills receivables have been shown in the accounts."
How assessing officer knows the appellant has WIP or bills receivables which have not been shown. If books of accounts are produced and the Ld. A.O is supposed to examine books of accounts, how he is justified in traveling beyond books of accounts by framing his own assumptions and conclusions, alleging possibility of WIP and bills receivables thereby making such a harsh assessment by rejecting books of accounts. I may invite kind attention of honors towards para 4 of page 39 of the paper book where it has been well explained that the appellant has stated receivable and no work in progress has remained at the year end. He has not been able to bring anything on record in terms of possibility of WIP nor it was in the previous year. Further he has not been able to point out any discrepancy related to the method of accounting followed by the appellant. Then it is not 22 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) understandable how his guess constitutes ground for rejection of books of accounts.
5 Non provision of Bank Statement Your honor everything is well stated in the books of accounts like, receipts, payments, other income, bank statements etc. it is not understandable what claim in respect of a bank account has to be made. What are the discrepancies which are pointed out however I many invite kind attention of honors towards para 5 of my one of the replies attached at page No 40 of the paper books where is clearly mentioned that bank account is attached. Even for argument sake bank statement is not provided does this mean that books of accounts be rejected for not providing bank statement.
6 FDR accounted for but details as per the will of the Ld AO not provided.
The attention of Honors is pointed towards our reply stated at para 10 and para 6 of page No 32 and 40 respectively of the paper book where it is stated that assessee has FDR for Rs. 1.00 Cr and interest accrued thereon is Rs. 5,10,000/-. The Ld. Assessing officer has checked ledger and found Rs. 5,10,000/- credited as Interest Income accrued on Fixed deposit with the bank.
If this is stated then the allegation leveled by the assessing officer is baseless and secondly how this could be reason for rejection of books of accounts. The amount of FDR is stated in the balance sheet and interest accrued is stated under the head other income. How this exhibits incompleteness of books of account.
Further the Ld. Assessing officer has made addition of Rs. 9,00,000 to the total income of the appellant. If this addition is made then how the same factor on which an addition is made constitutes a ground of rejection of books of accounts.
7 You have credited Rs. 20,30.658/- in P&L account. No specific details in this regard provided.
I may invite kind attention of honors toward para No 7 of my reply attached at page No 40 of the paper book where it is stated that Income to the tune of Rs. 20,30,658/- earned on account of Sale of scrap i.e left out material and interest income. It is not therefore understandable how this constitutes ground for rejection of books and amounts to estimation of Income.
8 Alleged that the appellant either failed to deduct tax at source or deducted partly.
Your honors I may invite kind attention of honors towards page No 7 to 23 of the paper book where all receipts of TDS returns are attached. Even if any TDS discrepancy was observed based on facts then it could warrant addition. How is this point reason for 23 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) rejection of books of accounts. All TDS details expenses along with TDS deduction and returns have been mentioned. I may invite kind attention of Honors towards Page No 35 of the paper book which clearly indicates TDS deduction details. The assumption is bad in law and therefore can nto hold good for justification of implication of provisions of section 145(3) of the Income Tax Act 1961.
9 Provision of supplementary partnership deed Copies of both partnerships deeds are attached at page No 24 and 28. Supplementary partnerships deed is executed for admission and retirement of other partners and it is not understandable how this constitutes discrepancy which warrants rejection of books of accounts."
15. On the basis of above submissions, it was stated that the A.O. willfully ignored the books of accounts for estimation of income at an higher side particularly when all the informations as were desired by the A.O. had been provided and given during the course of assessment proceedings. It was emphasized that the Gross Profit Rate for the year under consideration was at 20.91% in comparison to the Gross Profit Rate in previous year at 8.62%. Therefore the rejection of books of accounts was not justified when there was tremendous increase in the Gross Profit Rate.
16. Ld. Counsel for the assessee furnished the chart of Net Profit Rate for the last five years as per following details:
NP Ratio Assessed
A.Y. (after interest on capital U/s
and salary to partners.
2014-15 0.94% 143(1)
2013-14 0.75% 143(3)
2012-13 0.50% 143(3)
2011-12 0.40% 143(1)
2010-11 0.11% 143(1)
24 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
17. It was submitted that the assessee had shown better Net Profit Rate (after interest and salary to the Partners) in comparison to the preceding year, therefore the provisions of Section 145(3) of the Act applied by the A.O, without any basis and was bad in law. It was stated that the assessee had earned total contract receipt of Rs. 16,24,64,285/- and all the ledger accounts had been provided during the assessment proceedings to the A.O. who arbitrarily applied 8% Net Profit Rate on Rs. 13,65,47,363/- and made the addition of Rs. 97,92,990/- without any basis.
As regards to the addition of Rs. 45,40,497/-. Ld. Counsel for the assessee submitted that the A.O. while making this addition observed that " apparently either unexplained cash credit or receipt from unknown and undisclosed source of income", which clearly shows that the A.O. was not sure enough that the amount stated in the P&L Account was either unexplained cash credit or received from undisclosed source of income. It was further stated that the A.O. had hypothetically taken Rs. 2,82,39,322/- out of gross receipt as received from undisclosed sources and if it was received from undisclosed sources then he should not have applied a profit rate of 15% only, which clearly shows that he has considered it as business receipt and applied a higher profit rate. It was also stated that the A.O. himself was of the opinion that the said receipts were business receipts then what was the need to take the said amount out of gross receipt and make it a reason for rejection of books of account. It was further submitted that the sale of scrap was also taken out of P&L account and Net Profit Rate of 15% was applied on the receipt of Rs. 20,30,658/-. The said amount was shown by the assessee as an income and was disclosed in the books of account 25 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) which was treated by the A.O. as undisclosed and Gross Profit Rate of 15% was applied on the total receipts of Rs. 3,02,69,980/- (Rs. 2,82,39,322/- + Rs. 20,30,658/-) therefore the addition of Rs. 45,40,497/- was arbitrarily made and needs to be deleted.
18. As regards to the addition of Rs. 9,00,000/- on account of interest income accrued on the FDR, it was stated that the FDR was disclosed in the balance sheet, the interest income was earned on it and accounted for which was communicated to the A.O. It was stated that the interest amounting to Rs. 5,10,000/- was shown in the miscellaneous income, therefore the addition made by the A.O. was not justified. Reliance was placed on the decision of the ITAT, Rajkot Bench in the case of ITO Vs. Virgin Logistics reported in [2018] 53 CCH 0199 (Rajkot Trib), copy of the same was furnished which is placed on the record.
19. Ld. Counsel for the assessee also submitted that the case laws relied upon by the Ld. Accountant Member in his dissenting order were distinguishable on facts. It was further submitted that all the objections raised by the A.O. were rebutted by giving plausible explanation with evidences on record. It was stated that the A.O. admitted that books of accounts were produced and those were test checked and that no excess receipt or claim of TDS was pointed out. It was further stated that all the business receipts were considered against which expenses were booked which had been accepted by the A.O. It was also stated that accounts for all the projects were consolidated which were not doubted by the A.O. and the method of accounting regularly followed by the assessee was accepted, no suppression of stock and inflation of purchases was pointed out and the A.O. did not mention any specific instance 26 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) of the expenses which were not incurred for the business purposes. It was explained that there was no work in progress so it was not shown. It was stated that all the details of the TDS were furnished before the A.O. who had not pointed out any amount on which TDS was not deducted, a reference was made to page no. 35 of the assessee's paper book. It was submitted that in the preceeding as well as succeeding years no such addition was made as were made in the year under consideration and that the A.O. estimated the higher Net Profit Rate without pointing out any basis, therefore the rejection of books of accounts and the impugned addition made by the A.O. were not justified and the Ld. CIT(A) wrongly upheld the action of A.O. It was reiterated that all the contracts were completed, so there was no presumption that some work in progress or stock of the raw material was in possession of the assessee. As such the presumption of the A.O. for rejecting the books of account was wrong. Reliance was placed on the following case laws :
1. S.N. Namasiyam Chettair Vs. CIT 1960 AIR 729 (SC)
2. Chainrup Sampatrum Vs. CIT 1953 AIR 519(SC)
3. Chhabildas Tribhuvandas Shah Vs. CIT 59 ITR 733 (SC)
20. In his rival submissions the Ld. DR strongly supported the dissenting order passed by the Ld. Accountant Member and specifically relied on para 4 of the said order. It was submitted that the assessee furnished neither the details of work in progress and the stock nor the project wise details and no evidence was furnished for reconciliation to explain the difference between the receipt shown in books of account and as reflected in Form No. 26AS. It was further submitted that the Net Profit Rate shown by the assessee was 27 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) on lower side therefore by considering the various discrepancies noted by the A.O. the books of accounts maintained by the assessee were not reliable as such the same were rightly rejected by invoking the provision of section 145(3) of the Act and the A.O. was justified in estimating the income of the assessee by applying the Gross Profit Rate on the basis of comparable cases and the Ld. CIT(A) was fully justified in approving the view of the A.O. and the additions made by him.
21. I have considered the submissions of both the parties and perused the orders of both the Ld. Members alongwith the material available on the record. In the present case the A.O. invoked the provisions of Section 145(3) of the Act and rejected the books of accounts maintained by the Assessee, the main reason given for rejecting the books of accounts was that the contract receipt shown by the assessee were not fully reflected in Form No. 26AS. The AO considered the amount mentioned in Form No. 26AS at Rs. 13,65,47,363/- as correct and ignored the higher figure shown by the assessee in the books of account at Rs. 16,24,64,285/- the difference of Rs. 2,82,39,322/- was considered by the A.O. as cash credit or received from some unknown & undisclosed sources of income. The aforesaid view of the A.O. clearly shows that he was not sure as to whether the said difference was cash credit or trade receipt of the assessee. At the same time he considered this amount of Rs. 2,82,39,322/- alongwith another amount of Rs. 20,30,658/- which was shown by the assessees income from other, as business receipt from undisclosed and unknown sources. He applied 15% profit rate on such receipt. From the above facts it is crystal clear that the A.O. on the one hand considered the lower 28 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) amount reflected in Form No. 26AS as business receipt and on the other hand the difference of the amount shown by the assessee and taken by the A.O was also considered as business receipt but from unknown sources, in other words there was no doubt about the total receipts of the assessee which were at Rs. 16,47,86,685/- (Rs. 13,65,47,363/- + Rs. 2,82,39,322/-). The explanation of the assessee was that most of the Government Agencies were not filing TDS return in time that is why the amount shown by the assessee at higher receipt was not getting reflected in Form No. 26AS. In the present case, the assessee furnished the copies of the receipts before the authorities below, nothing was brought on record that those receipts shown by the assessee were not correct. In the instant case the Gross Profit Rate shown by the assessee for the year under consideration at 20.91% was much higher than the gross profit rate of the preceding year at 8.62%, therefore the rejection of books of accounts on that basis by the A.O. was not justified.
22. The another reason given by the A.O. was that the assessee had not maintained project wise books of account. In my opinion, that cannot be a ground to reject the books of accounts particularly when all the details relating to the receipt from the project were mentioned by the assessee in its books of accounts therefore this basis for rejecting the books was also not correct.
23. The A.O. in this case although stated that complete vouchers had not been produced, however he has not mentioned any particular voucher pertaining to the expenses which was asked and not produced. The A.O. while rejecting the books of accounts also mentioned that no work in progress or bills receivable had been shown in the books of account, the Assessee explained that he was 29 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) not having any work in progress or receivable. The A.O. had not brought anything on record to substantiate that how much work in progress pertaining to any of the project and how much bills receivable, were there. Therefore this observation of the A.O. was only on presumption basis that the assessee might have had some work in progress or bill receivable, so, the rejection of the books of accounts on this basis was not justified.
23.1 The A.O. also stated in the reasons for rejecting the books of account that assessee was having a FDR of Rs. 1 Crore but interest thereon was not shown, however the explanation of the assessee was that the interest amounting to Rs. 5,10,000/- on the said FDR was accounted for in the miscellaneous income of Rs. 20,30,658/- which also included the sale of scrap. The A.O. although could not rebut the said explanation of the assessee but consider the amount of Rs. 20,30,658/- as receipt of the assessee from undisclosed sources and applied GP Rate of 15% on the said amount. The said action of the A.O. is not understandable when the assessee himself had shown entire income, he applied GP Rate of 15% only on the said income which had already been disclosed by the Assessee, therefore, it could not have been a ground to reject the books of accounts.
23.2. Another allegation of the A.O. was that the assessee either failed to deduct tax at source or deducted partly. In this regard, the Assessee furnished the details of receipt and TDS which are placed at page no. 35 of the assessee's paper book, it was claimed to have been furnished before the A.O. The assessee also attached the details of TDS deducted, copies of necessary challans and acknowledgement of TDS at page no. 7 to 23 of the Paper Book 30 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) which were claimed to have been furnished before the authorities below. No specific discrepancy was pointed out in those details therefore this allegation of the A.O. also could not have been a ground to reject the books of accounts.
23.3 In the present case, the A.O. also alleged that the Net Profit Rate declared by the assessee at 0.69% was negligible. To rebut the said allegation the assessee furnished the details of the Net Profit Rate as under:
Assessment Year NP Ratio (after interest on Assessed U/s capital and salary to partners.) 2014-15 0.94% 143(1) 2013-14 0.75% 143(3) 2012-13 0.50% 143(3) 2011-12 0.40% 143(1) 2010-11 0.11% 143(1)
24. From the aforesaid details, it is clear that the Net Profit Rate was progressive and it was not consistent for all the years and when the A.O. accepted the NPR of 0.50% for the preceding Assessment Year 2012-13 while framing the scrutiny assessment under section 143(3) of the Act, this allegation that the assessee had shown negligible Net Profit Rate after interest on capital and salary to the partners was also not sufficient to reject the books of accounts of the assessee particularly when the Net Profit Rate shown after claiming the interest on capital and salary to the Partners for the year under consideration was better than the preceding years. In the present case the A.O. alleged that the assessee had claimed labour wages to the tune of Rs. 57,96,521/- against the gross receipt but no muster roll was furnished and that it had not appeared possible that such large man power / labour had been arranged without a service of mate and that the payments made were 31 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) covered under section 194C of the Act. However, no specific instance was brought on record to substantiate that the assessee was required to deduct the TDS on a particular payment of the labour, therefore the reasons given by the A.O. for rejecting the books of accounts were not sufficient particularly when the assessee had declared progressive Gross Profit Rate as well as Net Profit Rate in comparison to the earlier years and the A.O. himself considered the difference of gross receipts taken by him and disclosed by the assessee, as the receipts and applied Gross Profit Rate of 15% on the said receipts even when the assessee had already disclosed those receipt in its books of accounts.
25. Therefore by considering the totality of the facts as discussed hereinabove, I am of the view that the Ld. Judicial Member has taken a possible view in holding that the A.O. was not justified in rejecting the books of account, and since the rejection of books of accounts by the A.O. has been held to be unjustified the trading addition amounting to Rs. 97,92,990/- made by applying the Net Profit Rate of 8% was not justified when the Net Profit Rate declared by the assessee was better than the Net Profit Rate of earlier years which had been accepted by the department.
26. Similarly the addition of Rs. 45,40,497/- by applying the Net Profit Rate of 15% on the receipt and other income amounting to Rs. 2,82,39,322/- and Rs. 20,30,658/- respectively was also not justified when the assessee had already shown those receipts in its books of account and offered for taxation. Similarly the estimated addition of Rs. 9,00,000/- on account of interest on the FDR of Rs. 1,00,00,000/- was not justified when the assessee itself had already disclosed the accrued interest of Rs. 5,10,000/- and included the 32 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) same in the other income of Rs. 20,30,658/-. Therefore this addition on presumption basis also deserves to be deleted.
27. In view of the aforesaid discussion I concur with the view of the Ld. Judicial Member. Now this appeal would be placed before the regular Bench for giving effect to the opinion of the majority.
Sd/-
एन.
एन.के.सैनी, ी, ( N.K. SAINI) उपा य / VICE PRESIDENT AG Date: 09/01/2020 आदे श क ितिल प अ े षत/ Copy of the order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु#/ CIT
4. आयकर आयु# (अपील)/ The CIT(A)
5. वभाग ीय ितिनिध, आयकर अपीलीय आिधकरण, अम,तसर/ DR, ITAT, AMRITSAR
6. ग ाड, फाईल/ Guard File 33 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N.K.CHOUDHRY, JUDICIAL MEMBER ITA No.27(Asr)/2018 Asst. Year:2013-14 M/s Raja & Co., Pahli Pora, Vs. Income Tax Officer, Uri, Baramulla Ward-3(5), Baramulla PAN:AAEFR 9964N (Appellant) (Respondent) Appellant by: Sh. M.A. Mir (Cost Accountant) Respondent by: Sh. Charan Dass (Ld. DR) Date of hearing:12.09.2018 Date of pronouncement: .11.2018 ORDER PER N.K.CHOUDHRY, JM:
The instant appeal has been preferred by the Assessee/Appellant, on feeling aggrieved against the order dated
28.11.2017 passed by the Ld. CIT(A)-, Jammu u/s. 250(6) of the I.T. Act, 1961 (hereinafter called as 'the Act'), for Asst. Year:2013-14.
2. The assessee has initially raised the following grounds of appeal.
"1. The Ld. CIT(A)has erred in law and facts by confirming the action of the Ld. Assessing Officer by passing the assessment order u/s 143(3) but took the resource as directed by the section 144 of Income Tax Act, 1961.34 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
2. The Ld. CIT(A) has erred in law and facts by confirming the action of the Ld. Assessing Officer by not following the directions issued u/s 144A.
3. The Ld. CIT(A)has erred in law and facts by confirming the action of the Ld. Assessing Officer by not communicating the directions issued u/s 144 A.
4. The Ld. CIT(A)has erred in law and facts by confirming action of the Ld. Assessing Officer by rejecting the books of accounts without any reason and without taking cognizance of the reply submitted in response to the show cause notice in the regard.
5. The Ld. CIT (A) has erred in law and facts by confirming action of the Ld. Assessing Officer by not following the principles of the nature justice.
6. The Ld. CIT (A) has erred in law and facts by confirming action of the Ld. Assessing Officer by applying net profit rate of 8% on 3,02,69,980/-. The addition is bad in' law and liable to be deleted.
7. The Ld. CIT(A) has erred in law and facts by confirming addition of Rs.97,92,990/- made by the Ld. Assessing Officer to the total income of the appellant. The addition is bad in law and liable to be deleted.
8. The Ld. CIT (A) has erred in law and facts by confirming addition of Rs.9,00,000/- made by the Ld. Assessing Officer to the total income of appellant. The addition is bad in law and liable to be deleted."
3. However, the assessee, later on vide application dated 11.07.2018 amended the grounds of appeal which are required to be adjudicated by this order.
"1. The Ld. CIT(A) has erred in law and facts by not quashing the order passed by the Ld. Assessing Officer on rejection of books of Accounts of the Appellant arbitrarily without pointing out any such specific reason for invoking provisions of section 145(3) of the Income Tax Act, 1961.
2. The Ld. CIT(A) has erred in law and facts by confirmation addition of Rs.97,92,990/- on account of application rate of 8% on gross receipts posted by the Appellant.
3. The Ld. CIT(A) has erred in law and facts by confirmation addition of Rs.45,40,497/- on account of application rate of 8% on turnover of Rs.3,02,69,980/-35 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
4. The Ld. CIT(A) has erred in law and facts by confirming addition of Rs.9,00,000/- made by the Ld. Assessing Officer on account of interest accrued on FDR's."
4. The brief facts of the case are that the assessee firm is civil contractor and derived income from execution of civil contracts allotted by various agencies including the Govt. and had declared gross contract receipts at Rs.16,04,33,627/- besides other income of Rs.20,30,658/- which credited in P&L Account. The assessee had declared net profit rate to the tune of Rs.11,30,820/- @ 0.69% after claiming deduction on account of salary and interest to the partners. The case was selected for scrutiny under CASS and relevant statutory notices have been issued to the assessee firm, as it was observed by the Assessing Officer that the site/project wise books of account and other subsidiary records have not been produced for verification as well as there was mismatch in the details of the receipt as per 26AS and Form 16A, therefore, the assessee was required to provide party-wise details of the contract receipts as the assessee had shown contract receipts of Rs.16,04,33,627/- whereas the same was Rs.11,90,19,320/- as per 26AS.
On verification from the respective departments, the Assessing Officer observed total mismatch in the receipts as per the Revenue case, despite sufficient opportunities, the assessee had not produced proper and complete books of account or supporting vouchers in respect of various contracts executed at different places in J&K. It was also observed by the Assessing Officer that the assessee had claimed only 04 Bank Accounts but when later confronted the assessee admitted another bank 36 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) account with State Co-operative Bank , however no ledger account of this undisclosed account was provided and apparently the account was not accounted for. The assessee initially denied having any FDR but later admitted to have bank FDR whose details were not provided, which suggest incompleteness of the accounts. As the assessee had either failed to deduct TDS or deducted it partially in various payments attracting TDS provision as enumerated in the assessment order. No muster rolls of labours were provided despites specific request.
For the above said discrepancies in the maintenance of books of account, the AO rejected the books of account u/s 145(3) of the Act and made certain additions such as 97,92,990/- on account of contract income @ 8% of the contract receipts as affirmed by the parties to the A.O. Further, made an addition of Rs.45,40,497/- @ 15% of the total undisclosed source of income/receipts of Rs.3,02,69,980/- which held by the Assessing Officer as the excessive receipts shown are apparently either unexplained cash credits or receipts from some unknown and undisclosed source of income. Further, made an addition of Rs.9,00,000/- as interest @ 9% on the FDR of Rs.1,00,00,000/-.
5. The assessment was challenged before the ld. CIT(A), who partly affirmed the order of the Assessing Officer, however, reduced the reasonable profit @ 15% to 8% as held by the Assessing Officer on the unverified contract receipt of Rs.3,02,69,980/-.
37 ITA No. 27/Asr/2018(Asst. Year: 2013-14)
6. On being aggrieved against the order passed by the CIT(A), the assessee has preferred the instant appeal.
7. Having heard the parties at length and perused the material available on record. In this case, the Assessing Officer before rejecting the books of account u/s 145(3) of the act issued a show cause notice dated 29.02.2016 which was specifically replied by the assesee (Page No.36 to 38 of the PB).
The points raised in the show cause notice dated 29.02.2016 and specific reply to the specific questions given by the assessee are reproduced herein below for the sake of convenience and brevity.
38 ITA No. 27/Asr/2018(Asst. Year: 2013-14) Show Cause letter dated 29.02.2016 Show Cause Reply Please refer to the ongoing assessment proceedings in your case for the assessment Subject: Assessment proceedings for the year 2013-14. After considering the written Assessment Year 2013-14-furnishing of replies and other details furnished, it is information & documentary evidence in the observed as under; case of M/s Raja & Co-regarding.
Dear Sir, Please refer to your show cause notice vide No. 4407 dated 29/02/2016 regarding the "Rejection of Books of Account u/s 145(3)".
In this regard it is replied as under:
1. You have claimed heavy contract 1. The assessee has done contract works to receipts and TDS thereon which are not fully the tune of Rs.16,04,33,627.00 during the year reflected in the F. No26AS.Time and again you under consideration. This fact has been were requested to furnish date wise and brought into your notice multiple times so far contracting department/company wise details (Copy of the replies in which this has been of the contract receipts and TDS thereon. In communicated to you are enclosed herewith).
your replies so far, you have given varying I have also submitted ledger account of the explanations. First you relied upon the 26AS contract receipt along with my last reply. but that is matching. In one of your replies Quarterly Service Tax Returns filled by the dated 15.9.15 you stated the total receipts assessee thorugh which the assessee has paid during the year at Rs.1797200/ only. Later one the service Tax have also been provided. The more chart of the details were given which are fact was also communicated to you through an also not reconcile e.g. the receipts from Flood SMS dated 27/02/2016 at 11:36 am control Department shown at Rs.29663028/ (immediately after submission of the relevant when same have been confirmed at ledger account and reply thereabout). You are Rs.66413499/. Your failure to furnish date wise confronting your version on the basis of Form and contract wise details of the receipts 26AS that too when the assessee has shown despite giving reasonable time clearly suggest more receipts than the sum disclosed in form that such details are not available with you and 26AS. Lawmakers never intended to make it points towards the incompleteness of the possible to reject books of accounts merely books of accounts maintained and relied in the because the assessee has shown Income more return of income. than the information available with the Department.
2. Till date you have not furnished 2. The assessee has not maintained details regarding the nature and sites of the Project vise Books of accounts as desired by contracts executed. Since it appears that the your good self. However, consolidated books works have been executed in remote and of accounts have been maintained which have distant areas like Uri, Samba and Udhampur been produced earlier for verification. areas, it is clear that site wise and project /contract wise accounts were required to be maintained. No project /contract wise details and account books have been produced so far despite specific request for the same. It appear from the failure to furnish such Project wise books of accounts and other subsidiary records that such accounts have not been maintained 39 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) and this cast doubt on the correctness of the final trading results declared.
3. The assessee's NP rate is 1.85%
3. Till date complete payment vouchers (before interest on capital and salary paid to in respect of the expenses have not been partners). For the assessment year 2012-13, produced in absence of the supporting Worthy Assistant Commissioner of Income documentary evidence for the expenses Tax, Circle-3, Srinagar has assessed the trading claimed against the gross receipts to show results at NP rate of 1.55% (before interest on profits at a meager NP rate of 0.69%, the capital and salary paid to partners), which is correctness and genuineness of the expenses less than the NP rate declared by the assessee claimed is not verifiable and provides another for the year under reference (Copy of the ground for incompleteness of the book version assessment order enclosed) . It will not be . within the law to reject the books of accounts merely because of the difference of opinion, regarding the NP Rate, between the two Assessing Officers of the same assessee.
4. No Work in progress or bills 4. The assessee has shown bills receivable have been shown in the accounts .In receivable of Rs.3,23,370.27 in its books of view of tine large scale contract works that too accounts. Work in progress stands zero at the at various sites Including in summer zone end of the year under reference. This is what Udhampur and Samba, there is a strong the Books of Accounts show. Mere guessing possibility of such work in progress or material the possibility of WIP & Un-cleared bills does at site which has not been shown. Further not make the Books of Accounts reject-able. some bills presented but not cleared till 31.3.2013 cannot be ruled out but no such bills receivable shown.
5. Your allegation regarding the
5. You have shown bank account unclaimed bank account No.CD-1154 is wrong. No.1154 in the return. In your replies you have I have disclosed/claimed this account, along not claimed any such account. You claimed with other accounts, in my two of the replies only four bank accounts but when later submitted so far (Copy of the replies in which confronted, you admitted another bank claimed are enclosed). Further, please refer to account with State Cooperative Bank not my one of the replies enclosed in which I have earlier admitted. No ledger account of this not only claimed the Cooperative Bank account provided and apparently the account Account but also submitted relevant ledger was hot accounted for which clearly point account and copy of the bank statement. So, towards incompleteness of the books of your this contention for rejection of books of account maintained and relied upon. account is baseless.
6. The assessee has held FD for
6. For a pretty long time you denied to Rs.1,00,00,000/- (without interest) at the end have any FDR but later when confronted, you of the year. The assessee has earned interest admitted to have a bank FDR, however no income of Rs.5,10,000/- on this amount which details provided about it, which clearly has been disclosed by the assessee under the suggests the incompleteness of the accounts. head "Other Income" in its profit and loss accounts and accordingly paid the desired amount of tax on it.
40 ITA No. 27/Asr/2018(Asst. Year: 2013-14) Bifurcation of Rs.20,30,658/- has already been
7. You have credited Rs.2030658/ in the provided in the last reply (Copy enclosed).
P&L Account. No specific details in this regard provided despite repeated requests and is stated as sale of scrap etc. The failure to give details in this regard means that relevant details are not available and thus question the completeness of the accounts.
8. Besides above, it is noticed that you
8. The assessee was supposed to deduct tax on have either failed to deduct tax at source or Sub-Contract payments deducted it partly in respect of the following Professional Charges payments attracting TDS provisions;
Hire Charges Which it does and paid well within time.
Relevant details along with relevant challans have been submitted twice so far. Point-wise reply is given as under:
i) Commission No TDS made
i) The assessee has incurred
commission expense of Rs.57,000/- during the year under consideration. This has been paid to three different persons on different dates. Information in this regard is given as under:
S. No. Name of the Person Amt. Paid.
Hilal Ahmad Shah 8,000/- Shabir
Ahmad Sheikh 19,500/-
Syed Irshad Farooq 19,500/-
No TDS provisions were applicable on these
payments as these payments are below than
the monetary limit prescribed under section
194C.
ii) The assessee has incurred Rs.54,
ii) Hire charges Only TDS 1% is stated to 57, 700/- on account of Hire Charges which
have been made although relevant details of was subject to 1.00% of TDS. Partywise details
the date wise payments and TDS thereon not regarding the same have already been
provided. provided.
iii) Wages and labour- In view of the large iii) No labour contract was executed
scale contracts at various places, the for the year under reference. The labourers
engagement of labour mat is not ruled out were employed on daily basis. With the result
especially no muster rolls of the labour used TDS provisions were not applicable on these
not provided despite specific requests. payments. Copy of the labour register is
enclosed herewith.
41 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
iv) Relevant details of deductees with iv) Information regarding the
their PANs and e-TDS returns in respect of TDS deductees along with their PANs and copy of
made on payments to sub contractors also not the e-TDS returns filled by the assessee has
provided for verifying the correct compliance already been provided.
to the TDS provisions.
v) In heavy claim of salaries, payment of Salary payments made by the
salary to engineers attracting T D S cannot be assessee were also not subject to the TDS
ruled out but same is not ascertainable for provisions. To substantiate this claim copy of
want of relevant details not provided so far. the salary register has already been provided.
9. Copies of Two partner ship deeds
have been produced as per PS. deed dated
1.4.2006 there are only 4 partners , as per
supplementary PS deed there are 9 partners
and one Zuhaib Tanveer khan, is retiring. There is no evidence of adding more partners or any justification for claiming interest and salary paid to the retiring partner from your side.
From the above discrepancies and Having regard of the above mentioned observation, I am of the opinion that the books submissions it is clear that provisions of of accounts maintained do not present a clear section 145(3) are unwarranted. picture of your income and are not reliable.
Accordingly the trading /book version shown in the return of income on the basis of such incomplete books of accounts is liable for rejections. Accordingly for the above reasons and discrepancies, it is proposed to reject your book version by invoking the provisions of section 145(3) of the Income tax Act,1961 and assess your income by applying a higher Net profit rate as has been considered reasonable in contractor cases by many appellate authorities. However, before proceeding to complete your assessment for the assessment year under consideration in the manner provided u/s 145(3)/144, you are requested to furnish your explanation duly supported by the documentary evidence and records.
Although, in para No.10 of the assessment order, it is observed by the Assessing Officer that a written reply of the assessee was received by post on 18.03.2016, however, in the meanwhile, the assessee made an application u/s 144A of the Act to the ld.42 ITA No. 27/Asr/2018
(Asst. Year: 2013-14) Additional Commissioner of Income Tax, Range-3, Srinagar, who vide order No.921 dated 28.03.2016 directed to consider the request of the assessee to apply Net Profit rate of 1.55% to 1.85% to its case, however, after considering the written reply, books of account and other relevant facts and circumstances of the case as well as directions given by the Addl. CIT, Range-3, Srinagar, the assessing Officer rejected the books of account by observing 10 defects, which during the course of appellate proceedings before the ld. CIT(A) as well as before us specifically replied by the assessee .
The defect pointed out by the AO are reproduced herein below for the sake of ready reference.
"i. That the assessee has not maintained proper records in respect of the gross contract receipts and has not been able to give correct amount received from the respective contracting departments.
ii. That the assessee has not been able to explain the nature and source of large receipts introduced in the books as miscellaneous income and clubbed the same with the contract receipts.
iii. That the assessee has not maintained project wise, site wise books of accounts and subsidiary records which was required to be maintained in view of the distant site of operation at Udhampur, Samba and Uri and it was not practically possible to maintain single set of books of accounts for such contract works in different topographical regions at single places accounting of the financial affairs.
iv. That the assessee did not produce complete vouchers in support of the large expenses booked against the gross receipts to justify the negligible net profit rate of 0.69% declared.
v. That the assessee has not shown any work in progress or bills receivables at the various sites of operation/contracts when it has admitted the single digit percentage of completion of the contract allotted.
vi. That the assesse for a pretty long time admitted only one bank account bearing Number 1154 and the details of bank accounts with state cooperative bank was not provided to avoid enquiry about its credits.
vii. That in many replies the assessee did not admitted any FDR and it was only when confronted on the issue admitted that an FDR of Rs.1 Crore and claimed to have shown the same as loan, advances and deposits in the balance 43 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) sheet, however no relevant details of the purchase date, the interest earned etc have been produced.
viii. The assessee has claimed labour & wages to the tune of Rs.57,96,521/- against the gross receipts and no details like muster rolls have been produced to justify the such large claim. Further in view of the large claim it does not appear possible that such large manpower/labourers have been arranged without the services of Mate and thus the payments made are covered under 194C of the Income Tax Act, 1961.
ix. That on perusal of the details/records it has been noticed that assesssee has also erred proper compliance of TDS provisions as has been confronted to it vide the letter dated 29.02.2016.
x. That the assessee has also been found claiming salary to even some retired partners which was duly confronted to the assessee vide letter dated 29.02.2016."
From the perusal of the order passed by the authorities below and the reply filed by the assessee as well as arguments advanced by the assessee, it emerges that the main controversy in the instant case relates to the rejection of the books of account and therefore before, proceeding with the addition independently, we feel it appropriate to adjudicate the issue relates to the rejection of books of account first.
8. First observation of the Assessing Officer was that the assessee was required to produce site/project-wise books of account and other subsidiary records to substantiate the claim and help in verifying the correctness and completeness of the books version. On this query, it was specifically submitted by the assessee that the assessee has shown contract works to the tune of Rs.16,04,33,627/- during the year under consideration and this fact was brought into the notice of the Assessing Officer many times even ledger of account and contract receipts were also submitted.
44 ITA No. 27/Asr/2018(Asst. Year: 2013-14) With regard to second defect to the effect that the assessee has not been able to explain nature and source of large receipt introduced in the books, it was replied by the assessee that the assessee has disclosed total turnover of Rs.16,04,33,627/- as contract receipt.
With regard to the third defect to the effect that complete vouchers in respect of expenses have not been provided, it was replied by the assessee that the assessee has been maintaining the proper books of account as required by law and the same were examined by the auditors and in law there is no provision for maintenance of separate books of account for project wise.
4th defect was that the assessee did not produce complete vouchers in support of large expenses booked against the gross receipts to the justified negligible net profit rate of .69% declared. In this context, it was replied before the AO as well as submitted before us that the Assessing Officer was supposed to identify the expenses for which vouchers have not been produced and in absence of any such reason the allegation of the AO is not justified and even for the sake of argument if the vouchers are not being produced, then also it can warrant addition only, however, non-production of vouchers cannot form basis for rejection of books of account.
The defect no.5 pointed out by the Assessing Officer was that the assessee has not shown any work in progress or bills receivables at the various sites of operations/contracts when it has admitted that the single digit percentage of completion of 45 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) the contract allotted. The Assesse specifically replied that it is admitted fact that no WIP or bills receivables have been shown in the accounts, if had there been any work in progress, then certainly it would have figured in the books of account, however, even otherwise, the same does not form the basis for rejection of books of account.
Next defect no.6 as raised by the Assessing Officer in the assessment order was that the assessee for long time admitted only one bank account bearing No.1154 and the details of bank account with State Co-operative Bank was not provided in order to avoid enquiry about its credits. During the course of argument of the instant appeal, our attention was drawn to the page No.40 of the PB, wherein para No.5 it was specifically replied.
Coming to the next defect No.7 qua admission of FDR of Rs.1 crore without providing relevant details of the purchase date and the interest earned etc. It was replied by the assessee that from para No.10 of page no.32 and para no.6 of page no.40, it reflects that specific reply was given for having made an FDR of Rs.1 crore and accumulated interest of Rs.5,10,000/-. Further, from page no.57 of the PB, it clearly reflects that the amount of Rs.10,510,000/- has been shown as loans, advances and deposits in the balance sheet.
Further, with regard to the defects no.8 qua claiming of labour and wages to the tune of Rs.57,96,521/- against the gross receipts, it was replied by the assessee that the aforesaid 46 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) amount has rightly been claimed in accordance with law and even otherwise non producing of muster rolls etc. does not entail the rejection of books of account. Further, it was specifically submitted by the assessee vide para No.8 of page no.40 of the PB that no labour contract was executed for the year under reference as labourers were employed on daily basis, therefore, the TDS provisions were not applicable on these payments. Copy of the labour register was also provided to the Assessing Officer. Even otherwise, non-production of muster rolls cannot form the basis of rejection of books.
Vide defect No.9, it was pointed out by the AO that the assessee has also erred in proper compliance of TDS provision. This was also replied by the assessee as reflects from page no.23, 31 and 35 of the PB and further it was submitted that wherever it was obligatory on the part of the assessee to deduct TDS, the same had been done and the necessary details and challans of TDS payments have also been furnished to the AO and the necessary copies of necessary challans and acknowledgements of the TDS returns have also been attached vide page no.7 to 23 of the PB, therefore, the instant defect is also baseless and under no circumstances can form the basis for the rejection of books of account.
In response to defect no.10 qua payment of salary to some of the retired partners, it was replied by the assessee that the deed of partnership have been furnished and salary and interest also paid to the retiring partners as capital of the said partners remained invested in the business. Even, for the sake of 47 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) argument, the same cannot form the basis for rejection of books of account.
9. It is imperative to examine whether the defects pointed out in Assessment Order, constitute valid grounds for rejection of books of accounts under section 145(3) of the Act.
Section 145(3) of the Act enables the AO to make a best judgment assessment in the manner provided in section 144 of the Act, if he 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) has not been regularly followed by the assessee, or Accounting standards as notified under sub-section (2) have not been regularly followed by the assessee. In the impugned case, the AO has given a categorical finding in paragraph 11 that Books of account maintained/produced are not complete and do not give as true picture of the profits of the assessee , therefore the trading/book results of the assessee are not reliable and liable for rejection.
Section 145(3) of the Act empowers the assessing officer, in suitable case, to complete the assessment in the manner provided in Section 144 of the Act but Section 144 presupposes completion of assessment on the basis of all relevant materials gathered by the assessing officer, that too, after giving proper opportunity of being heard. ITO must record a clear finding. The ITO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee.
48 ITA No. 27/Asr/2018(Asst. Year: 2013-14) "Best judgment assessment" is not a provision to penalize the assessee, but is a machinery provision to enable the Revenue to assess a person when situation warrants an assessment. The order under s. 144 is to be made to the best judgment of the AO which means, the order has to be rational and is to be best on an honest guesswork for which some valid basis is available to the AO. The order involves exercise of 'judgment' by the officer. A fair estimation of income has to be made, the AO should take into consideration the totality of the facts and circumstances of the case in addition to proper evaluation of the material furnished by the assessee and collected by him by his own efforts. Where "best judgment assessment" power has been conferred, the limits of the power are implicit in his best judgment assessment". The judgment is vital to decide the matter with wisdom truly and legally. Judgment does not depend upon the arbitrary and capricious action of the Assessing Officer but on settled and invariable principle of justice."
In the instant case, the Asseeee had replied each and every query raised by the Asseeee and also submitted relevant documents in support of its contentions, From the aforesaid defects raised by the Assessing Officer and reply given by the assessee to the Assessing Officer and also submissions made before the first appellate authority including us, it clearly reflects that the assessee has replied each and every objection of the Assessing Officer with substantive evidence, therefore, in cumulative effect, we do not find any reason for affirming the rejection of books of account. Resultantly, the net profit rate 49 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) applied @ 8% on Rs.3,02,69,980/- set aside and the net profit rate as disclosed @ 69% by the assessee stands affirmed. Hence, ground No.1 and 2 stands allowed.
10. Ground NO.3 relates to addition of Rs.45,40,497, which was added by the AO on account of cash credits. The AO observed that the amount is apparently either unexplained cash credits or receipts from unknown and undisclosed source of income. As the same amount was reflected in the profit and loss account as business receipt which has not only attributed the gross receipt but also as net profit, therefore, the same cannot be treated as arbitrarily on account of other unexplained cash credit or receipts from unknown and undisclosed source of income. As we have already set aside the rejection of books of account, hence, result declared by the assessee shall prevail and resultantly the addition of Rs.45,40,497/- is also liable to be deleted.
11. Coming to ground No.4 qua addition of Rs.9 lacs, which was added by the Assessing Officer in the total income of the assessee as interest income accrued on FDR. From page No.32 & 40 of PB, it clearly reflects that the assessee had disclosed the FDR amount as well as accumulated interest and the same have been properly communicated to the Assessing Officer, therefore, the conclusion of the Assessing Officer is not correct and hence, the addition to the tune of Rs.9 lac is also liable to be deleted.
12. In the result, appeal filed by the assessee is allowed.
50 ITA No. 27/Asr/2018(Asst. Year: 2013-14) Order pronounced in the open Court on .11.2018.
-- Sd/- 04/12/2018
(SANJAY ARORA) (N.K.CHOUDHRY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: .10.2018
/PK/ Ps.
Copy of the order forwarded to:
(1) Shri Jagjit Singh, S/o Shri Amrik Singh, Gali Gujjran,
Jandiala Guru, Amritsar
(2) Income Tax Officer, 4(2), Amritsar
(3) The CIT(A)-Amritsar
(4) The CIT concerned
(5) The SR DR, I.T.A.T., Amritsar
True copy
By order
51 ITA No. 27/Asr/2018
(Asst. Year: 2013-14)
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH, AMRITSAR
In Re: Raja & Co. (in ITA No. 27/Asr/2018)-Assessment Year (AY) 2013-14.
I have perused the order proposed for and on behalf of the Bench by my ld. brother JM. However, being unable to persuade myself to agree therewith, I am am constrained to write my separate, dissent order.
2. The facts of the case in brief are that the assessee's, a firm in civil construction, accounts reflected a gross contract receipt of Rs.1604.34 lacs for the relevant year (PB pg. 56). The corresponding figure as per the tax deduction at source statement (Form 26AS) for the year, which reflected tax deduction by three parties, was however at Rs.1190.19 lacs. The assessee despite taking considerable time in the assessment proceedings, failed to reconcile the difference, even as it furnishes the break-up of Rs.1604.34 lacs as under (paras 5, 6 of the assessment order):
--Flood Construction Division (FCD) Rs.296.63 lacs
--PMGSY Rs.526.09 lacs
--AFCONS Infrastructure Limited Rs.781.62 lacs 52 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) Several other defects were also pointed out by the Assessing Officer (AO), for which, in his view, no satisfactory answer was forthcoming (refer pgs. 4-5, 6-7 of the assessment order):
(a) the assessee was not maintaining project-wise accounts in-as-
much as it was engaged in excuting several independent projects at different, physically distant sites, viz., Sambha, Udhampur, Uri and Baramulla;
(b) no work-in-progress (WIP) was shown at the year-end;
(c) the credit of Rs.20.31 lacs to the P&L account was not satisfactorily explained in terms of its' nature and source, i.e., other than stating it to be scrap sale and interest;
(d) the labour expenditure, claimed at Rs.57.97 lacs (the correct figure is Rs.28.32 lacs / PB pgs. 56, 80), was not properly supported by muster roll and vouchers, nor the services of a Mate shown; and
(e) the assessee did not produce vouchers in respect of a large number of expenses, which assumes added significance in view of the low disclosed profit rate of 0.69% of the turnover.
The assessee's accounts were therefore regarded as not correct and complete and, accordingly, found not reliable for deducing its' correct income therefrom. Invoking section 145(3) of the Act, the AO estimated the net profit at 8% of the gross contract receipt of Rs.1365.47 lacs, i.e., as confirmed by the three contractees u/s. 133(6) of the Act, relying on several decisions by the Chandigarh and Amritsar Benches of the Tribunal as well by the Hon'ble Punjab & Haryana High Court upholding a net profit of 10% of the gross receipt 53 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) (refer paras 11-13 of the assessment order). Further, a rate of 15% was applied on the balance receipt of Rs.302.70 lacs (i.e., Rs.282.39 lacs (Rs. 1647.87 - Rs.1365.47) + Rs.20.31) lacs. Besides, another Rs.9 lacs was added as unaccounted interest (at the rate of 9%) on FDR/s of Rs.100 lacs, on the basis of it being not accounted for. The same stood confirmed in first appeal except that the ld. CIT(A) reduced the rate of 15% on the receipt of Rs.302.70 lacs to 8%. Aggrieved, the assessee is in second appeal, raising the following grounds:
'1. The ld. CIT(A) has erred in law and facts by not quashing the order passed by the ld. Assessing Officer on rejection of books of Accounts of the appellant arbitrarily without pointing out any such specific reason for invoking provisions of section 145(3) of the Income Tax Act, 1961.
2. The ld. CIT(A) has erred in law and facts by confirmation addition of Rs.97,92,990 on account of application rate of 8% on gross receipts posted by the Appellant.
3. The ld. CIT(A) has erred in law and facts by confirmation addition of Rs.45,40,497 on account of application rate of 8% on turnover of Rs.3,02,69,980/-.
4. The ld. CIT(A) has erred in law and facts by confirming addition of Rs.9,00,000/- made by the ld. Assessing Officer on account of interest accrued on FDRs.'
3. Before us the assessee's principal case was that, true, it has not been able to reconcile the difference in the disclosed contract receipt (Rs.1604.34 lacs) and that per the TDS certificates (Rs. 1365.47 lacs), but, then, how could that; the disclosed turnover being higher, result in the assessee's books of account being rejected? Yes, the assessee was not maintaining its' accounts on project-wise basis, 54 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) but then there is no requirement in law for it to do so. There was not WIP as at the year-end for the assessee to have disclosed the same. The credit of Rs.20.31 lacs has been stated as on account of interest and scrap sales. There was no specification of the vouchers not produced, or defect/s in that produced, for the same to be given any credence. All these aspects had been explained to the Revenue authorities. The rejection of the account books is thus wholly unsustainable. Even otherwise, the assessee's disclosed gross profit (GP) rate for the year, at 20.91%, is much higher than 8.62% for the immediately preceding year (AY 2013-14) (PB pg. 80), calling thus for no further addition. The assessee has clarified to have accounted for the interest on FDR of Rs.1.0 cr. at Rs. 5.10 lacs.
4. The parties were heard at length. I have perused the material on record and given careful consideration to the matter.
4.1 The principal flaw in the assessee's explanation is that the disclosed turnover (as per accounts) being higher than that per the TDS certificates (issued by the deductees), no adverse inference from the non-reconciliation of the difference in-so-far as its' accounts are concerned, could be drawn. The argument, appealing at first blush, is misconceived. The only question relevant, it needs to be appreciated, for the purpose of section 145(3) is if the assessee's accounts are correct and complete, so that the correct and true income of its business liable to tax for the relevant year could be deduced therefrom. The requirement is inter-twined. It cannot be that the 55 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) accounts though not correct and complete, would yet result in correct or true income, quantification of which is a matter subsequent. An addition to income, it is again well settled, is not a concomitant of rejection (CIT v. Gotan Lime Khanij Udhyog [2002] 256 ITR 243 (Raj)). In the facts of a given case, no addition to income may be called for, which aspect of the matter is to be considered separately, and toward which reference is drawn to para 4.3 of this order. The contract receipt for the year is from only three contractees, who have allowed the assessee credit during the year at an aggregate of Rs.1365.47 lacs as per their accounts, in-as-much as the same forms the basis of the deduction of tax at source. What, then, is the nature and the source of the balance Rs.238.87 lacs ( Rs.1604.34 - Rs.1365.47) reflected as contract receipt in the assessee's accounts? I state this figure as, though not disputed, yet find no basis for the said difference being stated at Rs.282.39 lacs, i.e., by reckoning the contract receipt at Rs.1647.87 lacs, as against the disclosed turnover of Rs.1604.34 lacs. In fact, the assessee admits to have undertaken contract work only for the stated three contractees, stating the gross contract value and the amount received during the year to be at Rs.2588.81 lacs and Rs.179.72 lacs respectively (refer para 5 of the assessment order). Merely because the disclosed turnover (receipt) is higher would not absolve the assessee from its' obligation in law to explain the balance credit appearing in its' books for the year, i.e., as to its nature and source, which only would enable determination of its correct accounting 56 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) treatment. If the disclosed contract receipt is from, as stated, the said three contractees (or even another/s for that matter), why, one wonders, could the same be not reconciled with reference to the accounts, i.e., the accounts statement in each others' accounts? This is quizzical indeed. Further, even assuming it to be a revenue receipt, admission of which as so appears to be the thrust of the assessee's argument, it is only upon ascertainment of its' nature and source that the costs, if any, attributable thereto, and thus the income component thereof, which alone is to be subject to tax, could be determined. How, rather, is the same a contract receipt, as disclosed per the accounts, if the assessee has not undertaken contract work for any other person? In fact, removing the excess 'contract' receipt from the operating statement would result in a loss of Rs. 227.56 lacs! Is it that bills to that extent raised by the assessee during the year were not cleared by these parties, though accounted for by the assessee as income - in which case the difference would stand to be explained with reference to the account statement of these three parties and the corresponding bills. Why, if so, did the assessee not state so, giving the year-wise break-up of the contract work of Rs.25.89 cr. of these parties, concluding the matter. And in which case the bills would stand to be cleared in the subsequent year, at once proving the nature and source of the receipt as well as the reason for the difference; rather, also clarifying simultaneously the corresponding difference that would stand to arise in the subsequent year on the bills being passed by the contractees. In fact, there could 57 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) in such a case be an opening difference as well. Or is it that the same represents the contract work of an earlier year, accounted for by the assessee in the current year, i.e., on credit being allowed to it by the concerned contractee/s, or otherwise. If so, the answer again lies in the account statement. Again, why did the assessee not state so? Further, even assuming so, is the cost thereof also not claimed for the earlier year/s, but carry forward for being claimed during the current year? There is though no brought forward WIP for the assessee to contend so. The assessee, it may be clarified, has not at any stage, including before us, and despite availing sufficient time in the assessment proceedings itself, offered to reconcile the difference or otherwise show it to be contract receipt.
4.2 This brings me to the second flaw in the assessee's accounts, i.e., the non accounting of the WIP as at the year-end. Before, though, discussing the same, it may be stated that the non- explanation of the difference between the disclosed and the actual contract receipt implies that both the nature and source of the disclosed receipt - to the extent of the difference, is not proved. The only inference that follows is that the assessee's accounts for the year are not correct and complete. What, if any, adjustment to the assessee's returned income would, under the circumstances, be required to be made, is a different and another matter. Coming to the aspect of WIP, the assessee, while admitting to the non- maintenance of any stock record, claims non-reflection of the WIP 58 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) (as at the year-end) in its' final accounts on a factual basis, i.e., of there being in fact no WIP as at the year-end, ascertained physically. The same, firstly, has not been substantiated in any manner. Clearly, it is only where the work up to the end of the year has been billed that it could be said that there is no WIP as at the year-end. This is highly improbable as the work continues to the last day of the year, with all the projects being under progress thereat. Further, even as this, i.e., the billing of the work done up to the last day of the year is not shown, this is also surprising as the billing under a works contract is generally made at defined intervals of time or at defined stages of work completion. That, therefore, there is no WIP for any of the projects under progress, both as at the beginning and the end of the year, is difficult to understand. This position in fact obtains for the immediately preceding and succeeding years as well (PB pgs. 54, 74), making it inexplicable. Again, in the absence of any stock record, it is difficult to verify the assessee's claim of nil closing stock of any raw material and WIP at the year-end - so that, as claimed, all the material (at each site) stands consumed as on, and all the work done up to, the last day of the year, billed. For all we know, there may be no bill raised on the last day of the year, or the last bill raised be some time prior to the close of the year, even as the work continues unabated (at the year-end), also continuing into the following year, so that, clearly, material is available at the site for the same, as well as unbilled work, as at the year-end. This position becomes all the more inexplicable as, as afore-observed, it obtains from year to year.
59 ITA No. 27/Asr/2018(Asst. Year: 2013-14) Again, that apart, there is, as afore-stated, no stock record to verify the assessee's claim of no stock of any material or WIP as at the year- end. This would be a valid statement irrespective of the value - nil or otherwise, of the closing stock disclosed. Further, though there is without doubt no requirement in law for maintaining project-wise accounts, the same is borne out by the need to properly account for the direct expenditure, as well as revenues, of each project. The material, the purchase of which may be at the Head Office (HO), needs to be transported to the site, again pointing to, as a logistical necessity, the need to maintain inventory at the site. A proper material accounting would therefore suggest maintenance of record in respect of the materials bought, transferred to and consumed at the sites and, resultantly, in stock, at each location, i.e., the HO and the respective sites. Why, there may be, as indeed happens, some stock under transit from the HO to the site at the year-end. It is only when the stock at any stage (at the year-end) is properly accounted, and correctly valued, that would ensure correct income statement for the account period (Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC)). The absence of proper material and stock accounting is all too apparent in the instant case for the accounts to be regarded as and, accordingly, stated as correct and complete and, thus, liable to the true income of the business being deduced there-from. Reference in this regard be made to the decision Namasivayam Chettiar (S.N.) v. CIT [1960] 38 ITR 579 (SC); Chhabildas Tribhuvandas Shah v. CIT [1966] 59 ITR 733 (SC). The anomalies arising in quantification, as 60 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) would be apparent on a reading of para 4.3 (infra), viz., a loss of Rs.227.56 lacs (or Rs.247.87 lacs, if the miscellaneous income is also excluded, as it indeed ought to be) on contractual income, despite a sharp decline in the material cost, would demonstrate the distortion in the income determination that arises when the accounts are not correct and complete, and the income sought to be estimated without understanding the true nature of the credits and debits constituting the income statement.
4.3 I, in view of the foregoing, without going into of the merits of the other claims raised by either side qua the rejection of accounts or, as the case may be, the validity thereof, consider it to be a fit case for the rejection of accounts. The next question is with regard to the estimation of income. This aspect, not dealt with by my ld. brother, JM, as he has not approved the rejection of accounts, becomes therefore academic. This is as despite the same being considered and adjudicated upon by me, there would be neither any decision by both the members of the Division Bench qua the same, nor therefore by the majority, which is only on an issue being decided by the third member on a difference/s arising between the two members constituting the division bench. Deciding the same by me, in the absence of any adjudication thereof by my ld. brother, would be to preempt this issue, which I therefore eschew. This aspect shall therefore have to await the decision by the division bench upon the issue of the validity of the invocation of section 145(3) being decided 61 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) by the ld. third member. I may, further, before parting with this aspect, state that the AO has not invoked section 145(3) in view of a perceived low net profit, stated to be at 0.69% of the turnover. The same only forms, as indeed ought to be the case, the starting point of his enquiry into the assessee's accounts. His rejection of the same as not correct and complete and, thus, not reliable for deducing correct income there-from, is based on a number of deficiencies observed by him, two of which have been considered by me, finding them as sufficient to endorse and uphold the Revenue's application of section 145(3). Two, it needs also to be emphasized here that the assessee admits a miscellaneous income of Rs.20.31 lacs (PB pg. 56), stated to be on account of scrap sales and interest (on bank FDRs). The assessee has, thus, disclosed a loss of Rs.9 lacs on contract work (Rs.11.31 lacs - the disclosed profit, minus Rs.20.31 lacs), i.e., assuming the entire balance receipt to be contract receipt. Also, the assessee's claim of having disclosed a higher GP of 20.91% (as against 8.62% for the immediately preceding year) cannot be countenanced. This is as it is not clear as to what part of the difference in the disclosed contract receipt of Rs.1604.34 lacs, i.e., Rs.238.87 lacs, represents contract receipt and, two, for the current year. Further, whether the material cost corresponding to the same, which ought to be deducted in computing income, i.e., where the same indeed represents a contract receipt, has been claimed or not. As would be apparent from a broad comparison of the cost profile of the two years, there is a sharp decline in the material cost for the current 62 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) year in comparison with the preceding year, i.e., at 49.10%, as against 85.85% for AY 2012-13 (PB pg. 80). This, despite the contract receipt being taken - in reckoning the said percentage (for the current year) at the higher amount (Rs.1604.34 lacs), i.e., including the unexplained credit of Rs.238.87 lacs. Again, pointing to the need to ascertain its correct nature. In fact, the estimation of correct income in the present case itself poses a challenge. The answer perhaps lies in estimating accurately the costs not properly accounted for, viz., material, labour, etc., and applying a gross profit rate on the stated turnover. As regards the miscellaneous income of Rs. 20.31 lacs, stated to be scrap sale and interest, how, one wonders, could a profit rate be applied on these receipts, as done, firstly by the AO, who was not sure of the nature of the receipts, and then by the ld. CIT(A), who apparently treated the same as a part of the contract receipt.
5. The only other aspect that remains to be decided is qua the addition of Rs.9 lacs toward interest on FDR of Rs.100 lacs. The assessee claims to have accounted for interest thereon at Rs.5.10 lacs. The break-up of income of Rs.20,30,658/-, stated to have been furnished in the assessment proceedings, is not on record. No claim for any expenditure against the same has been made, so that the entire of it represents income. Subject therefore to the said income of Rs.5.10 lacs being included therein, which the assessee shall show 63 ITA No. 27/Asr/2018 (Asst. Year: 2013-14) to the AO at the time of giving effect to this appellate order, no separate addition is called for.
6. I decide accordingly.
Sd/-
Place: Amritsar (Sanjay Arora) Date: 31/1/2019 AM, Amritsar Benches