Income Tax Appellate Tribunal - Delhi
Italian Thai Development Public Co. ... vs Department Of Income Tax on 26 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'C' BENCH
BEFORE SHRI A.N. PAHUJA, AM & SHRI C.M. GARG, JM
ITA No.2587/Del/2012
Assessment year: 2007-08
Assistant D.I.T., V/s. Italian Thai Development
International.Taxation,Circle- Public Co. Ltd., 301-302, 3 r d
1(2),Room no.410, Drum Floor, Sagar Tower, Distt.
Shaped Building, I.P. Estate, Centre, Janakpuri,
New Delhi New Delhi
[PAN :AABCI 2013 D]
(Appellant) (Respondent)
Assessee by Shri S.R W adhwa &
Sumeet Sareen, ARs
Revenue by Shri D.K. Gupta,DR
Date of hearing 12-09-2012
Date of pronouncement 22-10-2012
ORDER
A.N.Pahuja:- This appeal filed on 29.05.2012 by the Revenue against an order dated 26.03.2012 of the ld. CIT(A)-XXIX, New Delhi, raises the following grounds:-
1 "On the facts and circumstances of the case, the CIT(A) erred in deleting the additions made by the Assessing Officer by holding that that the Assessing Officer was not justified in rejecting the books of accounts relating to the Koldam Project.
2 The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal."
2 ITA no.2587/Del./2012
2. Facts, in brief, as per relevant orders are that return declaring nil income filed on 13.11.2007 by the assessee, a foreign company incorporated under the laws of Thailand and engaged in the business of construction, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act) issued on 25.06.2008. During the course of assessment proceedings, the Assessing Officer (A.O. in short), noticed that the assessee was awarded a contract by the National Thermal Power Corporation Ltd. (NTPC in short), for civil works for dam, spillway and power intake package in respect of Koldam Hydro-Electric Power Project in the State of Himachal Pradesh with the letter of acceptance dated 12.12.2003. . In addition, the assessee was also awarded contract by National Highway Authority of India on 20.04.2006 for civil works for widening and strengthening of National Highway from 2-lane to 4-lane on the Assam Border in West Bengal. On perusal of the auditor's report dated 27th October, 2007, the AO noticed a number of observations regarding books of account and financial statement of the assessee in respect of NTPC, Koldam project:. The relevant observations/submissions of the assessee and comments of the AO extracted from assessment order are as under:-
" (i) Observation (Para b) The account balances with respect to the Koldam Project namely -
advance to employees aggregating to `.42,29,983/-, payables to head office aggregating to Rs.8, 00, 11,412/-, receivables from IT, Cementation aggregating to Rs.1,79,99,801/-, receivables from ITD- ITD Cementation JV aggregating to Rs.24,63,855/- and advances to vendors aggregating to RS.7,04,651/- are subject to confirmation and reconciliation. The impact of such non-reconciliation on the profit for the year is currently not ascertainable.
Submission of assessee The auditors have commented on the non availability of reconciliation confirmations from the employees, head office, ITD Cementation, ITD- ITD Cementation JV and vendors at time of audit. They have not qualified the expenses incurred or have not commented on the genuineness of the 3 ITA no.2587/Del./2012 expenses. These accounts are regular in nature and accordingly the payments are made or recovered as the case may be in the subsequent years. As on the date of balance sheet, no balances were in dispute. All the payments are made through banking channels. Since the genuineness of the parties as well as the expenses incurred are not doubted by the auditors, non-availability of reconciliation/ confirmation statements does not impact the reliability of the accounts.
It is important to mention here that advance to employees namely Late Mr. Diti Hengchaovanich (Rs.30,55,874/-) and Methanee Sangmas (Rs.5,43,909/-) were written off because of inevitable circumstances. In this regard, the company had passed a Board Dissolution on 29 December, 2008 to write off the balances. Copy of the Board Resolution and the ledger copy is attached as 'Annexure 3' to this letter.
In regard to payables to head office (Rs.8,00,11,412/-), we would like to submit that the ledger account of the HO maintained by the assessee was confirmed by the HO vide it's letter dated 17 April 2009 (copy of the same is attached as 'Annexure 4'). Your good-self may observe that the balance as on 31 March 2007 of Rs.8,00,11,412/- is categorically mentioned as opening balance as on 1 April 2008.
In regard to payables ITD Cementation (Rs.1,79,99,801/-), we would like to submit that the ledger account of !TD Cementation India Ltd. vide it's letter dated 17 April 2009 (copy of the same is attached as 'Annexure 5'). Your good-self may observe that the balance as on 31 March 2007 of Rs.1,79,99,801/- (Rs.75,30,548/- Plus Rs.1,04,69,253/-) is categorically mentioned as opening balance as on 1 April 2008.
In regard to receivable from ITD-ITD Cementation JV (Rs.24,63,855/-), we would like to submit that the aforementioned balance was carried forward as opening balance on 01 April 2008. Your good-self may observe that the balance as on 31 March 2009 was confirmed by ITD-ITD Cementation JV vide their letter dated 17 April 2009. Copy of the confirmation as well as the ledger copy is attached as 'Annexure .6' to this letter.
Comments:
The auditors' have stated that several advances and balances have not been confirmed and reconciled and have stated that the impact of such non-reconciliation is not ascertainable. The assessee's explanation is not tenable as discussed below:
a. Employee Advances (Rs.4,249,983)-
4 ITA no.2587/Del./2012 The assessee has submitted a copy of Board Resolution dated 28.12.2008 with respect to write off of two amounts i.e imprest paid to Late Mr. Diti Hengchaovanich (Rs.30,55,874/-) and imprest paid to Methanee Sangmas (Rs.5,43,909j-). The reasons for writing off the advances in the resolution is given as-
'That due to untimely demise of Late Mr. Diti Hengchaovanich, it has become extremely complicated for the company to tally the imprest account of late Mr. Diti with accounting records. Further in respect of the advance retained of Methanee Sangmas, it is stated that since Ms. Methanee had left the company in 2007, it has also difficult for the company to tally the imprest account of Ms. Methanee Sangmas with the company account.' The reasons for writing off the accounts of the above two employees do not conform to accounting practices generally followed by businesses. It also indicates that the imprest accounts of employees have not been properly maintained and reconciled even at the time when the employee leaves the company. It is also not clear when Mr. Diti passed away or when Ms. Methanee left the company and whether these facts were communicated to the auditors and whether any effort was made at the time of finalization of accounts to reconcile the figures of advances.
b. Payables to Head Office(Rs.8,00,ll,412), payables to ITD Cementation(Rs.l,79,99,801/-) receivable from ITD Cementation JV (Rs.(Rs.24,63,B55)-
The assessee has filed copies of confirmation letters dated 17.4.2009 sent to these parties for their counter confirmation. These letters have been sent to the parties in connection with the financial statements of year ending 31.3.2009 i.e. more than two years after closure of books of accounts for Financial Year 2006-2007. In said confirmation letters, the assessee has specifically requested the parties for confirmation of balances as on 31.3.2009 and listed the figures for the said balances in the letters. There is no mention of previous year's balances in the letter. The other parties while countersigning the letters have confirmed the balances listed in the letter i.e. the balances as on 31.3.2009. No where in the letter is there any mention of confirmation of accounts or relating to FY 2006-2007 or any other year. Though the assessee has, in the documents submitted during scrutiny proceedings, attached along with the copies of confirmation letters, a copy of ledger accounts of the respective parties showing opening balances as on 1.4.2007, there is no mention of these attachments in the confirmation letter either by the assessee or by the 5 ITA no.2587/Del./2012 confirming party. Therefore, the said ledger accounts cannot be taken as part and parcel of the confirmations sought from and provided by the respective parties. The confirmations therefore only relate to the balances as on 31.3.2009 which are part of the body of the letters itself. These confirmations have no relevance for the proceedings of the current financial year.
(ii) Observation (Para c) The project office at Koldam has not recorded any accrual for reimbursement of expenses claimed by ITD Cementation India Ltd. aggregating to Rs.46,90,019/-.
Submission The auditors have observed the ITD Cementation India Ltd. has put forward it's claims for different expenses. It is pertinent to mention here that such expenses could be recorded only when the company recognizes its liability towards those subcontractors/vendors against such expenses.
Comments:
The assessee's explanation is not tenable as it is not clear whether the principle of recognition of liability was correctly followed in terms of relevant accounting standard followed by the company. The nature of expenses and why these were not recognized as a liability specially when the auditors seem to believe that they should have been recognized is also not clear. The accounts in this regard cannot be said to be reliable.
(iii) Observation (Para d) As at March 31, 2007 the project office at Koldam has awarded contracts aggregating to Rs.3,962 million to various sub-contractors, but the amount considered in the budgeted cost used for determination of contract revenue for the year ended March 31, 2007 under the percentage of completion method aggregate to Rs.3,461 millio,n resulting in the contract revenue being overstated by Rs.501 minion.
Submission The auditors have observed on the lower estimation of the cost of the complete project. It is pertinent to mention here that the auditors have certified the projection of the company in respect to the estimated revenue from the project as well as estimated cost related thereto in relation to other elements of cost viz. materials, equipments, tools, power, oil & lubricants, spares, salaries & wages, transportation, service charges, rental, interest cost other administrative cost etc. 6 ITA no.2587/Del./2012 Their observation is limited to the sub-contractual expenses, which would result in increase in the total estimated loss of the project as well as loss computed for the year.
Comments:
The explanation of the assessee does not address the merit of the issue which is that the accounts are not reliable. Rather it seems to indicate that accuracy of accounts is important only if it affects the expense and discrepancies can be ignored if they relate to revenue. Even if this discrepancy regarding sub- contractual expenses results in increase in the total estimated loss of the project yet it indicates that the assessee is not following the accounting standards correctly and thereby distorting the overall financial picture of the business.
(iv) Observation (Para e) In the absence of reconciliation of capital advances and capital work-in-progress aggregating to Rs.6,34,46,836/- and Rs.46,73,243/-respectively with respect to the Koldam Project, we are unable to comment on the appropriateness of deprecation aggregating to Rs.17,54,03,721/-. We are also unable to comment if the capital advances are good and recoverable.
Submission The auditors have only pointed out their inability to comment on the appropriateness of the depreciation in absence of reconciliation of capital advances and capital work-in-progress. Your good-self may appreciate that both the items viz. capital advances and capital work-in-progress are items of balance-sheet and does not affect the quantum of depreciation. The fixed assets are recognized only upon the completion of capital work-in-progress and settlement of capital advances. Hence the same has no implication on depreciation and profitability of the project.
Comments:
The auditors have clearly stated that there is no reconciliation of capital advances and capital work-in-progress aggregating to Rs.6,34,46,836j- and Rs.46,73,243j- respectively with respect to the Koldam Project. They have also stated that they are unable to comment on the appropriateness of deprecation aggregating to Rs.17,54,03,721/-. As per normal practices, the comments made by thethe auditors are discussed with the management and the management is given an opportunity to rebut the observations before the audit report is finalized. The fact that the auditors have incorporated these comments in their report
7 ITA no.2587/Del./2012 clearly indicates that they were not satisfied with the explanation of the management and have cast a doubt on key items of financial statements such as depreciation.
(v) Observation (Para f) We have not been provided adequate and satisfactory documentation to support expenses aggregating to Rs.3,20,656/- as recognized in the Profit and Loss Account.
Submission Auditor's observation in this regard is in respect of adequate and satisfactory documentation to support expenses aggregating to Rs.3,20,656/-. Your good-self may appreciate that the quantum of expenses pointed out by the Auditor is insignificant and the same would not affect the authenticity of the accounts.
Comments:
Even though the quantum of expenses is not substantial, yet the fact remains that there is a discrepancy and reflects the inaccuracy of the accounts.
(vi) Observation (Para g) During the year the project office at Koldam had debited a sub-contractor (MCM) for an amount aggregating to Rs.49,34,067/- in respect of deductions against RA Bills at 10%. In absence of any agreement and confirmation by the sub-
contractor, we are unable to comment if the amount billed is appropriate.
Submission The assessee had given advance to M/s MCM Services Pvt. Ltd. "MCM") is one of the major sub-contractor for execution of the work sub-contracted. It was agreed between the assessee and MCM that the assessee will recover the advance alongwith an overhead charges from the RA Bill raised by MCM. Therefore, at the assessee has deducted 10% from RA Bills of MCM and recognized the same as 'miscellaneous income' during the year.
Hence, the observation of Auditors has no impact upon the computation of income.
8 ITA no.2587/Del./2012 Comments:
The assessee's has stated that the amount of 10% deducted has been separately shown as income under the head 'miscellaneous income'. However it has not addressed the main issue raised by the auditor which is that in the absence of confirmation or agreement with the sub-contractor, the entire amount billed and shown as expense cannot be treated as appropriate. Therefore the statement of the assessee that the observation of Auditors has no impact upon the computation of income is not correct and computation of profits in the books is directly impacted
(vii) Observation (Para h) During the year the project office at Koldam has capitalized certain fixed assets, spares and capital work-in-progress that were received from the head office free of charges. The value of such assets is estimated at Rs.3,81,13,765/-. In the absence of any confirmation from the head office, we are unable to comment if the balance of fixed assets and payables are properly stated.
Submission The above observation of the Auditor is an international transaction entered with the associated enterprise. The same was examined by the Transfer Pricing Officer ('TPO') while passing the TP Order. It is pertinent to mention here that the TPO has not found any inconformity of the above transaction.
Comments:
The examination of the TPO is with regard to value of transaction and not with regard to the balance of fixed assets and payables and its resultant effect on the financials of the assessee'.
(viii) Observation (Para J) The project office at Koldam maintains records of inventories which are not updated on a regular basis. In the absence of a proper reconciliation of the stock records, we are unable to comment if the closing stock of inventories at Koldam aggregating to Rs.8,82,39,243/-is properly stated.
9 ITA no.2587/Del./2012 Submission The auditors have pointed out that project office has not maintained the records of inventory on regular basis. The auditors have certified the purchase of raw material and components and stores and spares for the project during the year. It is once again submitted that the assessee company has recognized the revenue duly certified by the auditors in proportion to the stock charged off to the accounts and offered the same to tax. In view of the above, revenue has not been understated by the assessee company.
In case, whole of inventory was not considered as cost of the current year, the unbilled revenue would have simultaneously reduced.
Comments:
The assessee's submissions are not tenable. The raw materials and components and stores and spares charged to the profit and loss account vide Schedule I is arrived at by reducing the purchases by the closing stock. Hence without an accurate closing stock figure, it is not possible to arrive at the correct figure for stocks consumed during the year. Further the Schedule does not show any amount as opening stock of raw material and spares. It is pertinent to mention that the company's auditors have made several adverse observations regarding the assessee's accounts for financial year 2005-2006 as well including specific observations relating to closing stock. The auditors' observations, which also have bearing on the reliability of books of accounts for the current year are reproduced at Para 4. One of the important observations of the auditors for accounts of F.Y. 2005-06 relating to inventories is extracted below:
"The project office has not maintained proper records of its inventories. In the absence of proper records, raw materials and components and stores & spares purchased during the year aggregating to Rs.234,317,819 have all been recognized as an expense in the profit and loss account. We are unable to comment on the value of inventories that are not consumed as at March 31, 2006 and its impact on the profit for the year has not been determined by the management."
In view of these comments it is clear that the figure of closing stock for FY 2005- 2006 (which has been shown at NIL as all stocks have been shown to have been consumed, without any basis) and resultant figure of opening stock for the current financial year is not accurate. Even the closing stock figure for the current year is not accurate as per the auditors. Therefore the explanation of the assessee that figures of closing stock do not have any impact on the financials 10 ITA no.2587/Del./2012 cannot be accepted. The accounts maintained by the assessee therefore do not reflect the correct picture of the profits and affairs of the assessee.
(ix) Observation (Para j) In our opinion the internal controls relating to purchase and accounting of inventories and fixed assets are inadequate and requires strengthening and there has been continued failure to completely correct weaknesses in such controls.
Submission Auditor's observation in this regard is towards the weakness in the internal control systems of the company and the accounting of inventories and fixed assets. It is pertinent to mention here that the auditors have not doubted the authenticity of the purchase made during the year. They have only commented on the requirement to strengthen the internal control of the company. The said observation is made only in compliance with the specific requirement of CARO to comment on the internal control system towards the inventory and fixed assets. The same would not affect the authenticity of the accounts or of the purchases so made.
The auditors have commented on the non availability of reconciliations/confirmations from the subcontractors, vendors, suppliers, as the case may be at time of audit. They have not qualified the expenses incurred or have not commented on the genuineness of the expenses. These accounts are regular in nature and accordingly the payments are made or recovered as the case may be in the subsequent years. As on the date of balance sheet, no balances were in dispute. All the payments are made through banking channels. Since the genuineness of the parties as well as the expenses incurred are not doubted by the auditors, non-availability of reconciliation/ confirmation statements does not impact the reliability of the accounts. Detail of name and addresses of each vendor may be provided, if your good-self desires.
Under the above circumstances, we wish to submit here that the above qualifications of the auditors are restricted to the appropriateness of the cost allocated have no impact as well as interplay with the correctness of the books of accounts.
11 ITA no.2587/Del./2012 Comments:
The assessee has not countered the observation of the auditors regarding weakness in the internal control systems of the company and the accounting of inventories and fixed assets and thereby admitted that its accounts are not based on sound and strong internal control systems which is essential for proper account keeping of any business.
CONCLUSION:
The assessee's explanations with regard to various observations of the auditor's are not acceptable as discussed above. The assessee has merely tried to minimize the impact of the observations on its profits for the year under consideration. However as discussed above, key components of computation of profits of the assessee such as depreciation, closing stock, various items of expenses and even revenue are not accurately reflected in the accounts of the assessee. Therefore, the books of accounts of the assessee are not reliable and the undersigned is not satisfied about the correctness or completeness of the accounts."
2.1 In the light of aforesaid comments, rejecting the submissions of the assessee and while referring to similar observations of the auditors in the preceding assessment year, the AO showcaused the assessee as to why book results be not rejected in terms of provisions of section 145(3) of the Act. In response, the assessee submitted that they were maintaining books of accounts as per guidelines laid down in the Accounting Standard-7 prescribed by Institute of Chartered Accountant of India & the qualifications mentioned by the auditors in their report did not affect the correctness of the accounting methodology adopted by the assessee. However, the AO did not accept the submissions of the assessee and rejected the book results, having recourse to provisions of section 145(3) of the Act and proceeded to complete the assessment in the manner provided in the sec. 144 of the Act. Accordingly, the AO determined income @10% of the total receipts from NTPC, Koldam project and completed the assessment.
12 ITA no.2587/Del./2012
3. On appeal, the assessee relied upon a number of decisions in Brij Mohan Bansal Vs. Income-tax Officer (2009) 311 ITR 317 (P&H); Sriram and Co. Vs. ACIT, 316 ITR 139 (Raj.); Awadhesh Pratap Singh Abdul Rehman and Brothers Vs. CIT, 210 ITR 406 (All); S.N. Namasivayam Chettiar Vs. CIT (1960) 38 ITR 579 (SC); & Kachwala Gems Vs. CIT, (2007) 158 ITR 71 (SC) besides Pandit Bros. vs. CIT,26 ITR 159(Punjab);CITvs. Paradise Holidays,195 Taxman 291(Del.);Ashoke Refractories (P) Ltd. vs. CIT,279 ITr 457(Cal.);CIT vs. Vijay Construction,162 Taxman 34(All.);Dhakeshwari Cotton Mills Ltd. vs. CIT,26 ITR 775(SC);S.VeeriahReddiar vs. CIT,38 ITR 152 while reiterating their submissions before the AO.The assessee also pleaded that they maintained their books of accounts as per Accounting Standard-7 and proper records of purchases and expenses were kept. Since all the details requisitioned by the AO were submitted, the assessee pleaded that book results could not be rejected. In the light of these submissions, the ld. CIT(A) concluded as under:-
" 6.0 I have carefully considered the written submissions made on behalf of the appellant, the findings of the assessing officer in the assessment order and the material placed on record. The crux of the matter revolves around rejection of appellant's books of account u/s 145(3) by the assessing officer. In para 3 of his order, the AO has stated as under:-
"During the course of scrutiny proceedings for AY 2006-07, the assessing officer found several defects in the books of a/cs of the assessee and the accounts of the assessee were rejected due to various flaws such as adverse observations of auditors on crucial components of financial statements, doubt over genuiness of purchases and inability of assessing officer to verify certain expenses. Assessment was completed in that AY by estimating the profits @ 10% of amount billed to NTPC. The issue raised by auditors in the audit report for FY 2005-06 have implication on the veracity of books of a/cs for current FYs well. The closing balances of various act on which doubt is cast form the opening balances for this year. Over/understatement of revenue and expenses of AY 2006-07 affect the income and expenditure shown in accounts of cuurent year as well."
The AO has raised queries to the appellant during assessment proceedings regarding observations made by auditors in the statutory audit report. While framing the assessment order, the assessing officer has mentioned that the explanation provided by the appellant with regard to the various 13 ITA no.2587/Del./2012 observations of the auditor are not acceptable and in para 6.1 has held as under:-
"The reply of the assessee has been considered and not found to be tenable. As per the normal practices, the observations of the auditor are discussed with the management and the management is given an opportunity to rebut the observations before the audit report is finalized The fact that the auditors have incorporated these comments in their audit report clearly indicates that they were not satisfied with the explanation of the management and have cast a doubt on key components of computation of your profits such as depreciation, closing stock, various items of expenses and even revenue. The assessment is, therefore being completed after rejecting books of accounts in respect of Koldam Project as per provisions of section 145(3) and assessment is being completed in the manner provided in section 144 of the Act."
6.2 I have gone through the audit report and various observations made by the auditors. These observations are essentially similar to those made in audit report for A Y 2006-07. In Form No. 3CD, in point no. 8(b), it has been mentioned that there is no change in the nature of business or profession as undertaken in the immediately preceding year. Against point no. 11(b), it has been mentioned that there is no change in the method of accounting employed vis-a-vis method of accounting employed in the immediately preceding previous year. Against point no. 11 (d), it has been mentioned that there is no deviation in the method of accounting employed by the assessee in the previous year from the accounting standards prescribed u/s 145. Therefore, I from observations made by the AO and from audit report, it is apparent that the material facts in the year consideration are the same as those in the A Y 2006-07.
6.3 The appellant had explained how the auditor's observations do not affect the taxable income of the appellant. In this regard, the appellant has provided detailed explanations against each of the observations of the auditors along-with the supporting documents. The appellant vehemently submitted that it has already incurred a huge loss from Koldam Project because of various factors/reasons. In order to recover the loss, the appellant had filed an arbitration suit against NTPC Ltd. At present, the arbitration proceeding is under process. In addition to dealing with observations of the auditors, the AO has not pointed out any other defect in the books of ales. It was also submitted by the appellant that the Hon'ble ITAT New Delhi has adjudicated this issue in favour of the appellant for the assessment year 2006-07 wherein it was held as under:-
"The ld counsel referred to the remarks of the auditor, These were dealt with para-wise. The case of the ld counsel is that none of the remarks has any bearing on the correctness of the 14 ITA no.2587/Del./2012 books of account and, therefore, remarks cannot form the basis for rejection of books of account. In past, the books were maintained in the same manner which had been accepted (para 8.1) Before parting, we may also mention that although the auditors have made a number of notes to the accounts, the case of the ld Counsel is that none of the notes has any reflection on authenticity of books or the system of accounting. This submission has not been controverted by the ld DR in any manner. Therefore, we are of the view that no adverse conclusion can be drawn from these notes. (Para 10.4) 6.4 Since facts of the case for AY under consideration are similar to those during A Y 2006-07, in view of Hon'ble ITAT Delhi' decision in appellant's own case for AY 2006-07, I hold that the AO is not justified in rejecting the books of a/cs of the appellant u/s 145(3) under facts and circumstances of the case. Consequently, the assessing officer was not justified in making addition of Rs.9,25,82,275 by applying rate of 10% on the amount billed to NTPC of Rs.92,58,22,755. The addition on this account to the extent of Rs.9,25,82,275 is, therefore, directed to be deleted. As a result Grounds of appeal no. 4 & 5 are allowed."
4 The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while carrying us through the relevant observations of the auditors and findings of the AO in the light of reply furnished by the assessee. To a query by the Bench, the ld. DR did not reply as to how the observations of the auditors affect the profitability of the assessee in the year under consideration. On the other hand, the ld. AR on behalf of the assessee argued that observations of the auditors did not have effect on the correctness, accuracy or completeness of the accounts. The auditors nowhere mentioned that the assessee did not properly maintain the books of account. While reiterating their submissions before the ld. CIT(A), the 15 ITA no.2587/Del./2012 ld. AR supported the findings in the impugned order, similar addition having been deleted in the preceding assessment year by the ld. CIT(A)and his order having been upheld by the ITAT.
5. We have heard both the parties and gone through the facts of the case. The provisions of sec. 145(3) of the Act, invoked by the AO, lay down that if the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in section 144. As is apparent from the facts narrated in the impugned order, the AO nowhere recorded any finding that the books of accounts maintained by the assessee for Koldam project were incorrect, rendering it impossible to deduce the profit and despite that he proceeded to invoking the principles of best judgment. The ld. CIT(A),on the other hand, observed that there is no deviation in the method of accounting employed by the assessee in the previous year from the accounting standards prescribed u/s 145 of the Act while the auditor's observations did not affect the taxable income of the assessee, the assessee having provided detailed explanations against each of the observations of the auditors along with the supporting documents. The ld. DR, in response to a specific query by the Bench ,did not explain as to how the observations of the auditors affect the profitability of the assessee in the year under consideration. The only observation ,which the assessee failed to provide justification before the auditors and even before the lower authorities is in relation to expenses of `3,20,656/- mentioned in observation(f) above. Even no basis is apparent for estimating the profitability @10% nor any comparable instance has been given.. Accordingly, the ld. CIT(A) concluded that the action of the AO without pointing out any defects in the books of accounts, is totally unjustifiable and therefore, deleted the addition. The Revenue have not placed before us any material, controverting these findings of facts recorded by the ld. CIT(A). The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 16 ITA no.2587/Del./2012 26 ITR 775 (SC); Raghubir Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC); Brij Bhusan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC); Chouthmal Agarwalla v. CIT [1962] 46 ITR 262 (Assam); R.V.S. and Sons Dairy Farm v. CIT [2002] 257 ITR 764 (Mad); International Forest Co. v. CIT [1975] 101 ITR 721 (J & K) ; M. Durai Raj v. CIT [1972] 83 ITR 484 (Ker); Ramchandra Ramnivas v. State of Orissa [1970] 25 STC 501 (Orissa); Action Electricals v. Deputy CIT [2002] 258 ITR 188 (Delhi) and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217 (Gauhati) indicate that the AO is not fettered by any technical rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. The Hon'ble Gujarat High Court in the case of CIT Vs. Amitbhai Gunwantbhai, 129 ITR 573 held that if there is no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the AO to make any addition on estimate basis or on pure guess work. In the instant case, even in the preceding year ,book results were rejected on the basis of similar observations of the auditors & estimated addition was made. However on appeal, a co-ordinate Bench found that none of the remarks had any bearing on the correctness of the books of account and, therefore, remarks could not form the basis for rejection of books of account. In past also, the books were maintained in the same manner which had been accepted. Since the Revenue have not referred us to any material controverting the aforesaid findings of the ld. CIT(A) in the light of decision of the ITAT in the preceding year, we are opinion that the AO was not justified in rejecting the book results and add an estimated amount of claim of expenses of .However, there being no explanation in respect of claim of expenditure of `3,20,656/- mentioned in observation(f) 17 ITA no.2587/Del./2012 above, the amount is required to be added back.Theld. AR did not raise any objection if the said amount is added back. Accordingly, to that extent impugned order is modified and AO is directed to disallow the claim of these expenses. As regards other observations of the auditors, since there is no challenge to the transactions represented in the books in the light of these observations, then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. In the light of aforesaid observations of the Hon'ble Gujrat High Court, the view taken by a co-ordinate Bench in the preceding year on similar observations of the auditors & considering the totality of facts and circumstances in the instant case, we do not find any infirmity in the findings of the ld. CIT(A) except in relation to expenses of `.3,20,626/-.Accordingly, ground no 1 in the appeal of the Revenue is disposed of.
6.. No additional ground having been raised before us in terms of residuary ground no.2 in the appeal, accordingly, this ground is dismissed.
7.. No other plea or argument was made before us.
8. In the result, appeal is partly allowed as indicated above.
Order pronounced in open Court
Sd/- Sd/-
(C.M. GARG) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. Assessee
2 Assistant D.I.T.,International.Taxation,Circle-1(2),Room no.410, Drum Shaped Building, I.P. Estate, New Delhi
3. DIT International Taxation, New Delhi
4. CIT(A)-XXIX, New Delhi
5. DR, ITAT,'C' Bench, New Delhi
6. Guard File.
By Order, Deputy/Asstt.Registrar ITAT, Delhi