Income Tax Appellate Tribunal - Ahmedabad
The Dcit, Circle-2(1)(1),, Ahmedabad vs Ishwarcharan Builders Private ... on 23 August, 2021
आयकर अपीलीय अिधकरण, अहमदाबाद यायपीठ
IN THE INCOME TAX APPELLATE TRIBUNAL,
'' A'' BENCH, AHMEDABAD
(CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD)
BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER
And
SHRI WASEEM AHMED, ACCOUNTANT MEMBER
आयकर अपील सं./ITA No. 2315/AHD/2016
With
C.O.No.196/Ahd/2016
िनधारण वष/Asstt. Year: 2012-2013
D.C.I.T., Ishwarcharan Builders Pvt. Ltd.,
Circle-2(1)(1), Vs. A/502,Shapath-IV,
Ahmedabad. Opp. Karnavati Club,
S.G. Highway,
Ahmedabad-380058
PAN: AABCI8173N
(Applicant) (Respondent)
Revenue by : Ansha Prakash, CIT. D.R
Assessee by : Shri Aseem L. Thakkar, A.R
सुनवाई क तारीख/Date of Hearing : 07/07/2021
घोषणा क तारीख /Date of Pronouncement: 23/08/2021
आदेश/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal and CO have been filed at the instance of the Revenue and Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-2, Ahmedabad, dated 21/06/2016 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act"). The assessee has filed the Cross Objection in the Revenue's appeal bearing ITA no. 2315/AHD/2016 for the Assessment Year 2012-2013.
ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 2
2. The Revenue has raised the following grounds of appeal:
1. The Ld.CIT(A) has erred in law and on facts in deleting the closing work in progress u/s.145(3) amounting to Rs.5,81,99,012/- without properly appreciating the facts of the case and the material brought on record.
2. The Ld.CIT(A) has erred in law and on facts in deleting addition made on account of bogus purchases amounting to Rs.8,95,359/- without properly appreciating the facts of the case and the material brought on record.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer
4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.
3. The 1st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for ₹ 5,81,99,012/- by enhancing the closing WIP after rejecting the books of accounts under section 145(3) of the Act.
4. The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of real estate development. The assessee has undertaken 7 projects comprising of residential as well as commercial projects. The assessee has shown closing WIP as on 31 March 2012 in its audited financial statements of all the projects amounting to ₹ 139,13,00,537/- comprising of material & labour cost of Rs. 90,92,87,363/- and Land 48,20,13,174/- respectively. The assessee during the course of assessment proceedings has furnished the working depicting the manner in which the closing WIP w.r.t. material & labuor was determined. Such table with the figures is available on page 5 of the assessment order. As per the table the closing WIP was determined by the assessee in the manner as given hereunder:
Opening WIP xxx
Add:
Material & Labour xxx
Interest Expenses xxx
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Asstt. Year 2012-13
3
Other Finance charges xxx
Net Profit xxx
Less:
Sales Income xxx
Other Income xxx
Closing WIP xxx
4.1 However, the AO being dissatisfied with the working of the assessee pointed
out certain defects in the amount/calculation of closing WIP. The observation of the AO stands as under:
i. The assessee has shown sales of the units in the year under consideration for ₹ 29,81,62,232/- against which cost of construction was shown of those expenditures which were incurred in the year under consideration. In other words the opening WIP was not adjusted against such sales of units made in the year under consideration. Therefore, the opening stock of the WIP remained same as closing WIP as on 31st March 2012. As per the AO, the current year cost incurred by the assessee should certainly be higher than the cost of the opening the WIP as on 1st April 2011. Therefore, the assessee to reduce the profit against the units sold in the year under consideration has claimed higher expenses. ii. The assessee has worked out the net profit on estimated basis and thereafter computed the closing WIP as the balancing figure. As such the basis adopted by the assessee for determining the closing WIP was not based on any scientific and reasonable basis. Accordingly, the determination of profit based on estimate cannot give true and correct value of the closing WIP.
iii. The assessee has also factored the other income earned by it during the year under consideration in determining the closing WIP despite the fact that such other income was not attributable to the projects. As such, the ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 4 other income should have been taxed under the head income from other sources without adjusting the same against the closing WIP. iv. Under the standard conditions, the closing WIP is computed after considering the raw material cost, labour cost, other expenses and the interest portion if any separately. But the assessee has not done so. Rather the assessee has taken the same as the balancing figure which is against the prevailing accounting practices.
v. The assessee has not maintained the site wise registers showing the delivery of the goods received and consumed in the projects. In the absence of site wise registers, it is not possible to work out the particular material consumed in the particular project.
vi. The revenue from operation in the year under consideration has reduced by ₹1.31 crores whereas the total expenditure has increased by ₹ 2.95 crores which has resulted reduction in the net profit ratio in comparison to the earlier year from 22.33% to 9.25%.
vii. On sample basis, it was seen that the assessee has shown average cost of construction of its project namely "CITY" in its opening WIP as on 1st April 2011 at ₹ 8,418/- per square yard whereas the closing WIP as on 31 March 2012 shown by the assessee works out at ₹ 7,160/- per square yard. This fact proves that the assessee has undervalued its closing WIP.
4.2 In view of the above, the AO show caused the assessee proposing to reject the books of accounts under section 145(3) of the Act. However there was no reply from the side of the assessee for the rejection of books under section 145(3) of the Act. Accordingly, the AO rejected the books of accounts being unreliable and proceeded to estimate the closing WIP with respect to three projects only namely City, Island and Park as income was earned from only these projects by observing as under:
ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 5 In view of the above, following other income is not required to be reduced while computing closing WIP in the case of the assessee.
Particulars City Island Park Other Income 24426551 7 09 157 . 1 27 64 209 Less : Income to be_reduced from project cost Vatav 5,06393 28545 5 65 877 Site Misc income 8 67 060 5000 103866 Total 1373363 33545 6 69 743 Other income not required to be reduced 23053188 675612 1 20 94 546
The working of closing WIP as submitted by the assessee reflects that it has also considered other expenses as part of project cost and proportionate cost pertaining to such expenditure has been considered as part of closing WIP. The other expenses considered by the assessee includes Tax on AMC. stamping and legal charges, registration expenses and such expenditures are recovered by the assessee from its customers and same are reflected as part of other income in profit & loss account. In the precedings paras, it is clearly held that such income cannot be reduced while computing closing WIP and therefore, expenditure referred supra cannot be allocated to closing WIP Hence, other expenses considered by the assessee for computing closing WIP is re-considered as under:
Particulars City Island - Park
Expenses considered by the assessee Amount (in Rs.) Amount (in Rs.) Amount (in Rs.}
Other expenses 2 30 29 083 1647 236 26.14574
Less: expenses not to be allocated
Registration expense 1 1 34 600 1 17 100 582710
Stampinq & legal 6301 010 8 08 000 3645830
Tax on AMC 81 48 209 0 0
Expenses to be allocated 74 45 264 722136 33 86 034
5.15 As discussed herein above, even though the average construction cost per square
yard as 'in the assessee's case is more, the assessee has valued the closing WIP at a lower- value in order to reduce the net taxable income. Thus, from .the details provided by the assessee and to the extent" effect given in para 5.14, the project cost including opening WIP ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 6 for three projects is re-computed as under. 'Further.' the closing WIP of construction is recomputed considering the average project cdst computed in tabular chart and re- computed closing-WIP of construction is compared with closing WIP shown in books of account in-order to get the .value of understatement of closing WIP.
CITY Island Park
Particulars Atea Amount Rs Averag Area Amount Rs Average Area Amount Rs Average
e
Opening 301175791 14200000 129369514
WIP
Material 10734S259 45 16 664 154181705
Other 74,45,264 722136 3386034
Expenses
interest 1 84 39 S366 4916792 -
Expenses 6SS
Other 46382 1620 10 62 990
Finance
Charge
Total(A) 50561 4344152 2446 19445786 22900 293517035
381
Less:
Other 1373 363 675612 669743
Income
Total 50561 43 30 79 8565 2446 18770174 7 674 22900 29284729 12788
Expendit 018 2
ure
Closing 36864 263931071 7 160 1 476 6000000 4065 16200 2061 20 12 723
WIP 358
Shown by
the
assessee(B
)
Closing 36 86' 3157 57697 8565 1476 1 13 26 565 7674 16200 207167080 12788
WIP
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7
required to
be taken
as per
average
project
cosl(C}
Addition 51825726 5326 565 10 46 722
to doting
Stock (C-
B)
51.6 Thus, from tabular chart reproduced herein above, it is established that the assessee
has shown the value of closing WIP in respect of project City @ Rs.7160 per sq. yard for an area of 36864 sq. yards at Rs.263931971/-whereas the closing WIP .as, "per the correct valuation comes to Rs.315757697/- for an area of 36*864 @ Rs.8565 per sq. yard. Similarly, the assessee has shown the value of closing WIP in respect of project ''Island" @ Rs.4065 per sq. yard for an area of 1476 sq. yards at Rs.6000000/-whereas the closing WIP as per the correct valuation comes to Rs.11326565/- for an area of 1476 @ Rs.7674 per sq. yard. In addition to above, the assessee has shown the value of closing WIP in respect of project "Park" @ Rs.12723 per sq. yard for an area of 16200 sq. yards at Rs.206120358/- whereas the closing WIP as per the correct valuation comes to Rs.2071670820/- for an area of 16200 @ Rs.12788 per sq. yard. Thus, the assessee in total in respect; of projects "City", "Island" and "Park" has understated the value of the closing WIP by an amount of Rs.58199012/- (51825726 + 5326565'+ 1046722) and therefore, such under valuation of closing WIP.is added to the total income of the assessee applying the provisions of section 145(3) of the I.T. Act.
5. Aggrieved assessee preferred an appeal to the learned CIT (A).
6. The assessee before learned CIT (A) submitted point wise contention against the shortcoming pointed out by the AO as detailed under:
1. There is wrong understanding of the AO that cost of goods sold includes only that cost of material which was purchased during the year.
2. The allegation that closing WIP is a balancing figure and working of computation of closing WIP has no scientific base is out of context. The working is furnished in the format as recommended by the AO himself. Thus no inference can be drawn on the basis of such working of closing WIP. As such these detail were asked by the AO in connection with claim of interest.
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3. The closing WIP was computed scientifically. The working for the closing WIP was provided to the AO in specified format as desired by him (the AO).
4. The purchases are centralized. There are technical person and supervisor who remain present at site at the time of taking delivery of material and exercise the control over such material. They send summary about the material consumed and accordingly, the accounting is made at administrative office. All the bills and voucher were maintained at administrative office and the same were produced before AO. Further, the accounts were audited by the independent auditor and no adverse remark was made by the Auditor. Hence non maintenance of site wise register cannot be made a basis for rejecting of the book result.
5. As far as confirmation from certain suppliers is concern, they were not provided for the reasons that the same were not received. However, complete detail of bills along with payment against such bills has been submitted. Further, the AO made separate addition against such purchase from the impugned suppliers treating them as bogus. Once the separate has been addition made, then the books cannot be rejected.
7. The learned CIT(A) after consider the facts in totality deleted the addition made by the AO by observing as under:
5.9. Having considered the facts and submissions, it is noticed that in respect of other expenses such as; registration expenses, stamping and legal and tax on AMC amounting to Rs. 1,55,83,8197-
in respect of City Project, Rs.9,25,1007- in respect of Island Project & Rs.42,28,540/- in respect Park Project totaling to Rs. 2,07,37,4597- the AO has not allowed the capitalization as closing WIP as those expenses were recovered from the customers which were undisputedly shown as other income in the P & L Account. It has been noticed that there was no dispute in respect of the aforesaid three head of expenditures of which recovery have been included by the appellant in the head of other income in the P & L Account.
5.10. It is also worth here to mention that on the one hand, the other expenses including the above three head of expenditures have been added in the closing WIP and on the other side, the other incomes including the recoveries in respect ot dbove three heads of expenditure have been reduced from the closing WlP by the appellant. Thus, no effect of these three head of expenditure would be there in the quantum of closing WlP as shown by the appellant,- This has not been properly appreciated by the AO. Once the AO has reduced these three head of expenditures from other expenses, in that case, simultaneously the recoveries of these three head of expenditures ought to have been reduced by the AO from ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 9 the other income also, but the same has not been done so which led to the difference in the closing WlP. Thus, the AO's consideration one sided is not found correct. Even, these recoveries under the head of other incomes totalling to Rs, 4,06,31,0887- have been shown by the appellant in the P & L Account which is verifiable from the same. Even as per AO, if these three heads of expenditures are excluded from the value of closing WlP, then those expenditures ought to have been allowed as revenue expenditure in the P & L Account as against the recoveries thereof credited under the head of other income In the P & L Account. So, the effect of these three heads ought to have been considered in the books of account by the AO properly which is found absent while working out the closing WlP by the AO. Therefore, there is no reasoning to reduce these three heads of expenditures such as; registration expenses, stamping and legal and tax on AMC from the other expenses without giving effect of the recoveries of these three heads of expenditures from the other income head. Either these three heads of expenditures and their recoveries could be reduced from other expenses and other incomes simultaneously or in alternate without giving the effect of those in both sides. In result, the closing WlP value in both the methods is going to be same.
5.11. Similarly, in respect of other incomes in the form of vatav, site misc. income were only directed to be reduced by the AO and other incomes to the tune of Rs.2,30,53,1887- in respect of City project, Rs.6,75,6127- in respect of Island Project and Rs.l,20,94,546/- in respect of Park project not allowed to be reduced as other income from the capita! WIP. This was also found incorrect. It is worth here to mention that, the appellant himself has shown the other income of all these projects totalling to Rs. 4,06,31,088/- in the P & L Account. Since in these projects, the other income has been credited in the P & L Account separately then the closing WIP to that extent was to be reduced otherwise, it would cause the double taxation of the similar amount. It is also noted that in the project namely; Island, the AO has reduced the other income at Rs.6,75,612/- while as per its own stand the same could have been reduced only by Rs.33,545/-. So, there was no basis of the reduction of the . amount of Rs.6,75,612/- by the AO.
5.12, With regard to the AO's observation in respect of the City project that the average construction cost of the opening WIP was at Rs.8418 per Sq. Yard while the closing WIP was at Rs.7160 per Sq Yard itself was held the basis to hold that the closing WIP was at the reduced price. The detailed discussion in respect of this is made in Para No. 5.11 of the assessment order. On going through the same it has been noticed that the AO has wrongly calculated the opening WIP rate of Rs.8418 per Sq. Yard. In fact, the opening WIP was at Rs.30,11,75,7917- for the total area of 50561 Sq. Yard which comes to Rs.5957 per Sq. Yard. Thus, the opening WIP was at the correct rate of Rs.5957 Sq. yard as against the AOs working at Rs.8418 Sq. Yard. The AO has mistakenly worked out the rate of opening wip at Rs.8418 per Sq. yard by taking opening WIP, material labour, other expenses, interest expenses, other finance charges incurred during the year under consideration by reducing the other income which is incorrect. For working out the opening WIP rate, the AO ought to have only considered the value of the opening WIP and not the various expenditures and incomes during the year. So it is apparent that as against the opening WIP rate at Rs.5957/- per Sq. yard, the closing WIP rate was at Rs.7160/- per Sq. Yard, the closing WIP rate was at Rs.7160/- per Sq. Yard and hence, there was no understatement of the closing WIP rate as alleged by the AO.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 5.14. In view of the aforesaid discussion, the rejection of books of accounts and the addition made by the AO is found untenable. Moreover, the similar method for working of the closing ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 10 WIP has been adopted by the appellant in the preceding years also as adopted in the year under consideration. It is worth here to mention that during the year, the appellant had the seven projects in hand of which details are noted at Page No. 5 of the assessment order. But he has objected the valuation of the closing WIP in respect of only three projects namely; City, Island, Park, bul accepted the same method of working of closing WIP in respect of other projects namely; ICB Park, Bhavya, Bangalore - 2 and Flora for which no reasons have been given by the AO for not to make any revised closing WIP value in the similar lines as done in the other three projects. Thus the AO himself has taken the double standard for working out the closing WIP which is no sustainable. Thus, the closing WIP worked out by the AO in respect of three namely, City Island and Park is found not correct in view of the discussion made in the preceding pars and therefore, the addition made in this regard is deleted.
8. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us.
9. The learned DR before us vehemently supported the order of the AO.
10. On the contrary the learned AR before us filed a paper book running from pages 1 to 102 and vehemently supported the order of the ld. CIT-A.
11. We have heard the rival contentions and gone through the facts and circumstances of the case, including the materials available on record. As per section 145 of the Act, the AO is empowered to reject the books of accounts of the assessee and make best judgment assessment in the manner as specified under section 144 of the Act if he is not inter-alia satisfied with the completeness or correctness of the books of accounts of the assessee. Generally, the instances for the rejection of books of account include when entries in respect of certain transactions are altogether omitted or incorrect or where the accounts show an abnormally low rate of profit or where there is an inherent lacuna in the system of accounting. However, the AO cannot use this power as a tool to reject the books of accounts merely due to non-maintenance of the stock register, variation in gross profit and non-furnishing of certain vouchers or its explanation or non-confirmation of sundry creditors. Anyway, before rejecting the books of accounts, the AO must record the specific ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 11 reasons for rejecting the books of accounts. Such satisfaction has to be established and substantiated based on facts and figures, which further depends on the circumstances of each case. Mere minor mistakes/typological errors/absence of stock registers/ lower GP may not ipso facto amount to incorrectness/ incompleteness of accounts in terms of section 145(3) of the Act. But the case would be different where the above-mentioned mistakes are coupled with other findings. In the given case, AO has rejected the book results of the assessee based on the facts and figured culled out by him during the assessment proceedings as detailed hereunder:
i. The assessee has inflated cost of construction towards the units sold during the year. The assessee while allocating material & labour cost against the units sold has not considered opening WIP meaning thereby only the cost i.e. material & labour cost incurred during the year was allocated to the units sold during the year.
ii. The basis adopted by the assessee for the working of closing WIP was not based on scientific method. The working of closing WIP provided by the assessee depicts the residual value or balancing figure after taking the profit on estimated basis. Thus the profit declared by the assessee was not reliable.
iii. Site wise registers for the material purchase and consumed were not maintained. Hence site/project wise true figure of stock or WIP was not verifiable.
iv. There was lower gross profit and net profit in comparison to the last year. v. The assessee has undervalued its closing WIP as compared to the total cost incurred during the year.
vi. No confirmation from certain sundry creditors was filed by the assessee in support of its purchases.
11.1 In the light of the above facts, the AO invoked the provisions of section 145(3) of the Act and thereby he has enhanced the value of closing WIP resulting ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 12 inflation in GP and ultimately NP of the assessee. Besides this, the AO also made independent addition of Rs. 8,95,000/- on account of bogus purchases.
11.2 From the preceding discussion we find that the AO has rejected the books result declared by the assessee mainly for the reason that method adopted by it for calculation of closing WIP was not scientific. As per this method, the closing WIP declared by the assessee is representing the residual or balancing figure which is not correct and resulted in under valuation of closing WIP. At this juncture it is necessary to analyze the method adopted by the Assessee viz-a-viz methid recommended by the AO.
11.3 The assessee while working the closing WIP has added all the direct expenses attributable to particular project after adjusting other income to the opening WIP then subtracted the cost of unit sold and shown remaining amount as closing WIP in the following manner:
Opening WIP xxx
Add:
Material & Labour xxx
Interest Expenses xxx
Other Finance charges xxx
Net Profit xxx
Less:
Sales Income xxx
Other Income xxx
Closing WIP xxx
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11.4 In other word the method adopted by the assessee is identical to the formula for determining the closing WIP i.e. Opening Stock + Purchases + Other direct expenses - Cost of goods sold which is accepted widely.
11.5 On the other hand, the AO accumulated all the expenses incurred and adjusted with other income and worked out the cost incurred per unit for the entire area including the area on which construction was completed and sold. On the basis of such per sq. mtr cost, the AO has valued the closing WIP after multiplying with area on which construction is yet to be completed. As such the AO has not considered/excluded the cost of units sold in the calculation of closing WIP. The module adopted by the AO is reproduced as under:
Opening WIP xxx
Add:
Material & Labour xxx
Interest Expenses xxx
Other Finance charges xxx
Less:
Other Income xxx
A. Cost of project xxx
B. Total area of project xxx
C Cost per sq. mtrs.(A/B) xxx
D. remaining area at end xxx
Closing WIP (C x D) xxx
11.6 In our considered view the method adopted by the AO is not correct for the reason that per unit cost incurred on finished goods or to say units completed cannot be equal to the cost incurred on the units still under construction. The cost to the ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 14 completed units will always be on higher side and cost to units under construction will be on lower side for the simple reason that cost with respect to the units under construction requires more cost/expenses to be incurred. As such, we are in agreement with the method adopted by the assessee where the assessee reduced the cost of the units sold/completed from entire cost incurred on the project and treated the remaining cost as WIP which is in connections with the units under construction. This method of the assessee has been followed consistently over the year which was also accepted by the Revenue. Likewise, the same method was also adopted by the assessee in its other projects which were also not disturbed by the Revenue.
11.7 Apart from the method employed in computation of closing WIP the AO also highlighted certain other facts such site wise register not maintained, confirmation certain supplier not provided. In this connection we found that the assessee has submitted stock register maintained at administrative office, good receipt note from site manager, purchase invoices and evidence of payment. In these documentary evidence no defect was pointed out by the AO. Therefore, without bringing any corroborative material on record suggesting purchase were inflated or sales were suppressed the book result cannot be rejected merely for non-maintenance of site-
wise register or not providing the confirmation of the suppliers. In holding so we draw support and guidance from the judgment of Hon'ble Allahabad High Court in case of Awadhesh Pratap Singh Adbul Rehman & Bros v/s. CIT 201 ITR 404(All) which reads as;
"It is difficult to catalogue the various types of defects in the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where a stock register, cash memos, etc., coupled with other factors like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the authorities would be ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 15 justified to reject the account books under section 145(3) and to make the assessment in the manner contemplated in these provisions."
11.8 Without prejudice to the above, we also note that the AO after rejecting the books accounts has calculated the closing WIP of the assessee having regard to the cost incurred by the assessee with respect to the materials, labours, other expenses, finance cost and other income. In other words, the AO has relied upon the same set of data/figures as shown by the assessee except making some minor adjustment in the other income and other expenses shown in the books of accounts. There were certain items of other income and expenses which were excluded while calculating the closing the WIP by the AO on the reasoning that these items of other income and expenses were not attributable to the projects. As such, there was no iota of doubt on the genuineness of the other income and the expenses was brought on record by the AO. To our mind, once the books of accounts have been rejected, the AO has to estimate the profit and he has no right to make any individual addition to the total income of the assessee. However in the case on hand, the AO has enhanced the value of the closing WIP as well as disallowed a part of purchases independently by treating them as bogus, which is not permissible under the provisions of law. In holding so we draw support and guidance from the judgment of this tribunal in case of Hynope Food and Oil Industries Pvt. Ltd reported in 48 ITD 202 where it was held as under:
Section 145 deals with two situations : (a) where the method of accounting is faulty, and
(b) where the accounts are not correct or complete. In the case of the former, the Assessing Officer is empowered to compute the income upon such basis and in such manner as he may determine. So far as the latter is concerned, the Assessing Officer is empowered to make a best judgment assessment as provided in section 144, that is, after taking into account all relevant materials which he has gathered. Further, section 145(1) is an enabling provision. It is intended to enable the Assessing Officer to make the correct assessment which is the paramount object. It is not intended to confer any right or benefit upon an erring assessee. Thus, this section is intended to make the correct assessment in compliance with the law and not to by-pass the statutory provisions.
It is a fair proposition that if an overall estimate of income has been made, there would not be any scope for making any disallowances and applying section 40A(3). This is not because the statutory provisions can be ignored or excluded but because they must be deemed to have been applied in making the estimate so that there is no scope for any further deductions. Thus, if an estimate is made on the basis of gross profit by using comparative ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 16 instances, there would be no scope for further deductions applying section 40A(3). Therefore, all depended upon the manner of making the estimate. If it had been made in a way which covered the entire position regarding income and expenditure, naturally there would not be any scope for further deductions.
11.9 At this juncture, we also find pertinent to note that even assuming the closing WIP calculated by the AO is correct, then also it has tax neutral effect. It is for the reason that such closing WIP shall become the opening WIP in the next year and therefore there will not be any impact on the income of the assessee except the income of one year will shift to the income of another year. On this reasoning as well, we do not find any merit in the order of the AO. In view of the above and after considering the facts in totality, we do not find any infirmity in the order of the learned CIT (A). Accordingly, we uphold the same. Hence the ground of appeal of the revenue is dismissed.
12. The next issue raised by the revenue is that the learned CIT (A) erred in partly deleting the addition made by the AO for Rs. Rs. 4,47,680/- on account of bogus purchases.
13. The assessee, inter alia, has shown purchases amounting to ₹ 35,81,435/- only from certain parties as detailed under:
Name of party Amount
(Rs.)
Angel Sales Corporation 1437296
DR Trading Co. 724887
Durga Trading Co. 55220
Girdharilal Mulaji Soniqram 512500
Jitubhai Nanjibhai Vanzara 106600
Karan Enterprise 207583
ITA no.2315/AHD/2016
With
C.O No.196/Ahd/2016
Asstt. Year 2012-13
17
Pavan Enterprise 133403
Shubh Enterprise 153907
Vidhata Enterprise 250039
Total Rs 3581435
13.1 However, the AO during the assessment proceedings found that the TIN i.e. Gujarat Commercial Tax registration in case of most of the parties as mentioned above were cancelled as evident from the official website. Likewise, the assessee has also not furnished the evidences for the supply of goods from these parties such as freight receipt, goods delivery challans etc. Similarly , the AO also found that the assessee has not filed the confirmation of some of the suppliers/ parties as mentioned above. The details of such parties, amount of purchases and the date of cancellation stand as under:
Name of party Amount Date of cancellation of
(Rs.) TIN
Angel Sales Corporation 1437296 05/11/2009
DR Trading Co. 724887 01/07/2002
Durga Trading Co. 55220 30/09/2009
Girdharilal Mulaji Soniqram 512500 No Confirmation given
Jitubhai Nanjibhai Vanzara 106600 No Confirmation given
Karan Enterprise 207583 04/12/2008
Pavan Enterprise 133403 22/06/2009
Shubh Enterprise 153907 15/02/2005
Vidhata Enterprise 250039 25/09/2006
Total Rs 3581435
ITA no.2315/AHD/2016
With
C.O No.196/Ahd/2016
Asstt. Year 2012-13
18
13.2 In view of the above, the AO was of the view that the assessee has shown bogus/inflated purchases in order to reduce its taxable income. Accordingly, the AO treated 25% of such purchases i.e. 25% of ₹ 35,81,435/- as bogus/inflated purchases and added the sum of ₹ 8,95,359/- to the total income of the assessee.
14. Aggrieved assessee preferred an appeal to the learned CIT (A) who has partly deleted the addition made by the AO by observing as under:
7.5. Having considered the facts and submission, it is noticed that the main reason of making the disallowance was in respect of the aforesaid parties was the cancellation of their sales tax numbers and not providing the evidences of supply of goods to the AO. However, the AO has treated these purchases as genuine but made the disallowance only @ 25% of the purchases from them. Alt the payments have been made through cheques which has not been doubted by the AO. There is no evidence on record stating that any amount from the aforesaid parties have came back to the appellant. Even there is no evidence in the form of any admission of accommodation entries taken by the appellant, therefore, the genuineness of the, purchases cannot be doubted. It has been submitted by the appellant that the net profit in the year under consideration was at 5.74% as against the NP rate of 4.05% in the immediately preceding year. Even in the subsequent year, the N. P. rate was at 0.10%. It was also submitted that in all these years, the assessment u/s. 143(3) has. been made. As noted above, in the year under consideration, the N. P. rate was higher as compared to the N. P. rate of preceding year as well as of subsequent year.
However, it Is noticed that the appellant has failed to provide the supply of the goods in the form of delivery notes, freight receipts etc. which conclusively did not authenticate the genuineness of the purchases from the said parties. Thus, on these facts, the possibilities of the inflated purchase rate cannot be denied. It has also been noticed in other cases having the identical facts, the Hon'ble Courts have confirmed the disallowance @ 12.5% of the purchases which would meet the end of justice when the assessee has failed to prove the genuineness of the actual purchases from the parties from whom bills have been obtained as per the rates given in the bills / invoices. In fact one of the purposes of adopting this modus operand! is to reduce the profits by inflating the purchases rate. Thus, by making the disallowance @ 12.5% of such purchases, the affect of such inflation of the purchase rate and profit embedded therein is negated. Therefore, the disallowance of the purchases @ 12.5% in the case of the appellant is confirmed respectfully following the judgements / decisions of Hon'ble Courts.
CIT vs. Bholanath Polv Fab (P) ltd 2013) 355 TTR 290 [Gu|-HC) Section 69 of the Income-tax Act, 1961 - Undisclosed investments [Bogus purchases] - Assessment year 2005-06 - Assessee was engaged in business of trading in finished fabrics - Assessing Officer found that concerned parries from whom material was purchased were not found at their addresses and held that purchases made by assessee were bogus -Accordingly, he made disallowance - Tribunal found that though purchases were made from bogus parties, but purchases ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 19 themselves were not bogus as entire quantity of stock was sold by assessee and held that only profit margin embedded in such purchases would be subjected to tax and not entire purchases - Whether no illegality was committed by Tribunal - Held, yes [Para 6] [In favour of assessee].
. CIT Vs. Sheth (2013) 356 ITR 451 (Guj-HC) Section 145 of the Income-tax Act, 1961 - Method of accounting -Estimation of Profits [Bogus purchases) - Assessment year 2006-07 -Assessee was engaged in business of trading in steel on wholesale basis -Assessing Officer having found that some of alleged suppliers of steel to assessee had not supplied steel to assessee but had only provided sale bills, held that purchases made from said parties were bogus
- He, accordingly, added entire amount of purchases to gross profit of assessee - Commissioner (Appeals) having found that assessee had indeed made purchases, though not from named parties but other parties from grey market, sustained addition to extent of 30 per cent of purchase cost as probable profit of assessee - Tribunal however, sustained addition to extent of 12.5 per cent - Whether since purchases were not bogus but were made from parties other than those mentioned in books of account, only profit element embedded in such purchases could be added to assessee's income-Held, yes -Whether hence, order of Tribunal needed no interference-Held Yes[paras 6,7 & 9] [in favour of assessee].
CIT vs. Sathyanarayan P. Rathi [2013] 38 taxmann.com 402 (Gujarat HC) Section 143 of fhe Income-tax Act, 1961 - Assessment - Additions to income [Purchases from market] - Assessment year 2003-04 - Assessing Officer made addition of entire amount of purchase on- ground that concerned suppliers had never supplied goods as named by assessee -Commissioner (Appeals) as well as Tribunal having found that though purchases were not made from parties from whom assessee claimed but such materials were purchased from open market incurring cash payment and bills were procured from various sources, held that only profit element at rate of 1 2.5 per cent was to be added to income of assessee - Whether present case being one of only purchase but not from disclosed sources it would be only profit element embodied.in such purchase which could be . added in income of assessee and thus, rightly so done by Commissioner (Appeals) and Tribunal - Held, yes [Paras 6 & 7] [In favour of assessee] 7.6. In view of the aforesaid discussion, fhe disallowance of Rs.4,47,680/-i.e. @ 12.5% of the purchases from the aforesaid parties amounting Jo Rs.35,81,435/- is confirmed. In result, the relief is granted for the balance disallowance of Rs.4,47,680/-.
15. Being aggrieved by the order of the learned CIT (A), both the Revenue and the assessee are in appeal before us. The revenue is in appeal before us against the restriction of the addition made by the AO from ₹ 8,95,359/- to ₹ 4,47,680/- only whereas the assessee is in appeal against the addition confirmed by the learned CIT (A) for ₹ 4,47,680/- only. The assessee has raised its ground in the CO. 196/AHD/2016 as stated below:
ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 20 The Learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of alleged bogus/inflated purchases of Rs.4,47,680/- @ 12.5% of Rs.35,18,435/-
16. The learned DR before us submitted that the assessee has made bogus purchases amounting to ₹ 35,81,435/- but the AO was kind enough to make the addition of the element of profit embedded in such bogus purchases at the rate of 25% amounting to ₹ 8,95,359/- only. Accordingly, the amount of disallowance made by the AO should be sustained.
17. On the contrary, the learned AR before us submitted that purchases have been made against the payment made through account payee cheques. Therefore, the purchases cannot be treated as inflated/bogus in nature. It was also contended that the purchase cannot be disallowed on the reasoning that registration certificate of the suppliers has been cancelled. The learned AR in support of his contention drew our attention on pages 80 to 98 of the paper book where copies of the ledgers were placed.
18. Both the learned DR and the AR before us vehemently supported the order of the authorities below to the extent favourable to them.
19. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we find that the addition made by the AO was primarily based on two reasons. Firstly, the registrations of these parties/suppliers were cancelled and secondly the assessee failed to furnish the details of the freight charges paid by the assessee qua such purchases and delivery challans of the goods.
ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 21 19.1 As far as the cancellations of the registrations are concerned, there may be numerous reason such as non-filing of the return, not depositing the tax or involved in bogus transaction etc. Therefore, merely the registration of the supplier cancelled can't be a ground to draw an inference that the purchases shown by the assessee are bogus/inflated. Rather, the cancellation of the registration suggests that the parties/suppliers have been in existence. Indeed, the information of the cancellation of the registration certificate may create suspicion about the genuineness of the transaction but there cannot be any addition/disallowances merely on the suspicion. In such a situation, the Revenue is expected to be more vigilant and to carry out the necessary inspections by issuing notice under section 133(6)/131(1) of the Act. As such, the cancellation can be a reason to trigger the investigation but no conclusion can be drawn based on such cancellation of the registration certificate.
19.2 Moving further, it was the duty of the assessee to furnish the details about the freight charges paid by it qua the purchases in dispute which has been elaborated/ discussed in the preceding paragraph. Likewise, it was also the duty of the assessee to furnish the evidences to prove that the goods against the purchases shown by it has been received in actuality. However, we find that the assessee has failed to furnish the necessary details before the authorities below. Likewise, we also note that the learned AR for the assessee has also not brought anything on record to disprove the allegations of the Revenue. Accordingly, the possibility of inflated/bogus purchases in the absence of these documents cannot be ruled out in the given facts and circumstances. But the entire purchases cannot be treated as bogus and the element of profit embedded therein can be added. On perusal of page no. 75 placed in the paper book, we find that the assessee has shown net profit at the rate 5.74% which has not been disputed and the same is also higher in comparison to the other year. Thus the profit determined by the ld. CIT-A appears ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 22 to be reasonable. Thus, we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue and the assessee are dismissed.
19.3 In the result, the appeal filed by the Revenue is dismissed.
Coming to the CO bearing No. 196/AHD/2016 filed by the assessee.
20. The assessee has raised the following grounds of appeal:
1. The Learned Commissioner of income Tax (Appeals) has erred in confirming the disallowance of alleged bogus/inflated purchases of Rs.4.47,680/- @12.5% of Rs.35,18,435/-
2. The Learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs.47,551/- made by the Assessing officer u/s.40A(3) of the I.T.Act.1961.
3. The Learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs.3420/- made by the Assessing Officer in respect of deposit for the Employees Contribution to provident Fund.
4. The Respondent craves leave to add, alter, amend or modify any of the grounds of appeal on or before the date of hearing of appeal.
21. At the outset the learned AR submitted that he has been instructed by the assessee not to press ground No. 2 and 3 on the reasoning that the amount involved in the dispute is of negligible value. Accordingly, we dismiss the ground raised by the assessee on account of smallness of amount involved in the dispute. Hence the grounds raised by the assessee are dismissed as not pressed.
22. The 1st issue raised by the assessee is that the learned CIT (A) erred in partly confirming the addition of Rs. 4,47,680/- on account of bogus purchases.
ITA no.2315/AHD/2016 With C.O No.196/Ahd/2016 Asstt. Year 2012-13 23
23. At the outset we note that the issue raised by the assessee has already been decided against it along with the appeal of the Revenue bearing No. 2315/Ahd/2016 for A.Y 2012-13 vide paragraph number 19 of this order. For the detailed discussion, please refer the relevant paragraph. Hence the ground raised by the assessee in the CO is dismissed.
23.1 In the result, the CO filed by the assessee is dismissed.
24. In the combined results, the appeal filed by the revenue is dismissed and the CO filed by the assessee is also dismissed.
Order pronounced in the Court on 23/08/2021 at Ahmedabad.
Sd/- Sd/-
(MAHAVIR PRASAD) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
(True Copy)
Ahmedabad; Dated 23/08/2021
Manish