Income Tax Appellate Tribunal - Delhi
Eastern Construction Company vs Income-Tax Officer on 29 August, 1997
ORDER
B.M. Kothari, A.M.
1. This appeal by the assessee is directed against the order passed by the learned CIT(A), Muzaffarnagar, on 5th March, 1991 for asst. yr. 1986-87.
2. The appellant firm is carrying on business of civil contractors. The firm filed its return of income on 25th September, 1986, declaring taxable income of Rs. 2,10,000. The copies of final accounts such as P&L a/c and balance sheet were not enclosed with the said return. The AO, therefore, issued a notice on 8th December, 1986 calling upon the assessee to remove the defects pointed out in the said notice and to furnish copies of final accounts. The assessee furnished the second return on 1st January, 1987, showing taxable income at Rs. 1,12,320. The assessee also filed copy of balance sheet and P&L a/c along with the said return. The assessee filed the third return on 2nd December, 1987, declaring taxable income at Rs. 1,80,230.
The appellant-firm did not maintain regular books of accounts. The final accounts were claimed to have been prepared on the basis of bills, vouchers and other statements maintained by the assessee and also from the certificates received from the clients and banks. The AO in para 3 of the order has mentioned that the assessee did not produce any accounts books, vouchers or papers though notices under s. 142(1) were issued for producing the same on more than one occasion. The AO, therefore, observed that the assessee has prepared copies of P&L a/c and balance sheet just on estimated basis without having any documentary evidence to support the same. The AO also recorded the statement of the managing partner Shri Gurucharan Singh and the extracts from such statement have been reproduced in the assessment order. The managing partner in the said statement has admitted that account books were not maintained. The return have been filed on the basis of gross receipts. He also stated that the P&L a/c have been prepared on estimated basis. The AO also observed that the gross contract receipts, cost of material supplied by the awarder of the contract and the net contract receipts shown by the assessee in the statements annexed with the various returns were different. The AO, therefore, required the assessee to explain and reconcile the said difference. The assessee submitted explanation vide letter dt. 11th March, 1988. The AO had duly considered the same in the assessment order. After discussing the facts relating to the aforesaid matter in detail, the AO came to the conclusion that the assessment in the assessee's case will have to be completed by resorting to provisions of s. 145. On behalf of the assessee it was claimed that it would not be fair on the part of the Department to apply a net profit rate of 12.5 per cent. The AO also observed that in the case of the assessee if net profit rate of 12.5 per cent. is applied on net contract receipt after deducting the cost of material supplied by the principles, the income will come on the lower side than that of the figure of income which may be computed by starting from the net profit as per P&L a/c submitted by the assessee and after making suitable additions out of various expenses shown as also addition in respect of income from undisclosed sources. The AO accordingly determined the assessee's income at Rs. 8,86,140.
3. The CIT(A) restored back the matter to the AO in respect of some items of additions, partly deleted some additions and also confirmed some of the disallowances and additions made by the AO. The brief details of additions made by the AO and the order passed by the CIT(A) in relation to various additions and disallowances are indicated in the following chart :
Net Profit as per P&L a/c 1,80,230 Remarks/Order of CIT(A)
submitted along with the
third return of income
furnished on 2nd December,
1987.
Additions made by the AO :
Sundry creditors not proved 1,42,860 Restored back to AO
Income out of gross payments
not disclosed by the assessee :
(a) Contract payments received Restored back to AO
from Ex. Engineer, Upper
Brahmani Investigation
Division, Rourkela,
claimed to have given on
sub-contract to one
Rawlley & Co.
5,11,927
(b) Labour Escalation Addition of profit
charges received deleted
not included in
contract receipts.
7,74,273
---------
12,86,200
---------
Profit estimated by 1,60,775 Partly deleted and
the AO @ 12.5 per cent. partly restored back
to AO, as indicated
above
(c) Assets pledged/possessed 16,364 Restored to AO
in lieu of overdraft
facility availed from
Indian Overseas Bank.
(d) Unexplained credit 20,128 Addition confirmed
difference in bank account
on account of Bank
Reconciliation Statement
(e) Disallowance out of 3,35,784 Disallowance restricted
expenses debited in to 5 per cent. i.e.
P&L a/c @ 10 per cent. Rs. 1,67,892 confirmed.
of total expenses
(f) Interest as advanced 12,000 Restored to AO
(g) Disallowance out of 18,000 Restored to AO
interest -----------
8,86,141
-----------
Depreciation debited in P&L a/c Rs. 53,468 was allowed.
4. The assessee has raised the following grounds in their appeal against the aforesaid order of the CIT(A) :
"1. That the authorities below were not justified in making addition for different items instead of applying the profit rate as has been done in the earlier years of the assessments of the assessee firm. The learned assessing authority should have adopted the same method in this year also.
2. That rate method should have been applied in computing the income of the assessee as is being done in assessment of the contractors of similar nature.
3. That the authorities below were not justified in making addition of Rs. 20,120 on account of difference in reconciliation of receipts with bank statements.
4. That there was no justification in making addition on account of escalation in expenses. The addition has been made without any basis and on presumption only. The additions made on this account should be deleted.
5. That in any case the additions made are highly excessive and unjustified."
5. The Revenue has also submitted an appeal against the said order. The assessee has submitted a cross-objection relating to the appeal submitted by the Revenue. The Revenue's appeal and the cross-objection submitted by the assessee relating to the Revenue's appeal could not be heard along with the assessee's appeal and those matters were adjourned with the consent of both sides.
6. The learned counsel for the assessee submitted that it is a case where no books of accounts were maintained. The AO could not, therefore, invoke the provisions of s. 145(2) of the Act. The said provisions can be invoked only in cases where the AO is not satisfied about the correctness or the completeness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee. It is a case where no books of accounts were maintained. Therefore, the AO ought to have estimated the assessee's income on the basis of past history. The AO could apply a net profit rate by taking into consideration the past records or the results shown by the other comparable cases of civil contractors. Instead of adopting such a method of estimating the assessee's taxable income, the AO has made various ad hoc disallowance and additions without any basis. Such additions and disallowances cannot be validly sustained. The learned counsel also brought to our notice that the various additions which have been set aside and restored back to the AO cannot now be adjudicated upon by the AO as the time-limit prescribed in s. 153(3)(ii) has already expired and no fresh assessment has been made.
7. The learned counsel submitted that as regards addition of Rs. 20,128 on account of unexplained difference in bank balance found as a result of reconciliation statement submitted by the assessee, the assessee has perhaps no strong case on merits but such an addition could not have been made by the AO, where an assessment is made according to the best judgment of the AO by invoking of provisions of s. 145(2).
8. The learned counsel vehemently contended that the disallowance of 5 per cent. out of total contract expenses sustained by the learned CIT(A) as against the disallowance made by the AO at 10 per cent. of the total expenses is patently wrong and unjustified. He submitted that the total expenses debited in the P&L a/c annexed with the third return comes to Rs. 33,57,845. The AO made ad hoc disallowance @ 10 per cent. to the tune of Rs. 3,35,784. The learned lawyer submitted that such a disallowance has been made by the AO without application of mind. He has not given any basis on which the finding of inflation of expenses to the extent of 10 per cent. can be supported. Such ad hoc and lumpsum disallowance without any basis is invalid. He pointed out that the AO in para 9 of the assessment order has observed that the expenses debited by the assessee in the P&L a/c are quite disproportionate in relation to the disclosed contract payments received during the year. The learned counsel argued that no disallowance out of expenses can be made on the ground of their being disproportionate to the corresponding contract receipts. The expenditure should be real and if it is incurred for the purpose of business, the same will be clearly allowable under the provisions of IT Act.
(i) The learned counsel also invited our attention towards the chart placed at p. 1 of the paper-book in which the comparative figures of gross contract receipts, net profit declared by the assessee in asst. yr. 1983-84 to asst. yr. 1985-86 have been given. The details mentioned in the said chart inter alia reveals that the net profit rate declared by the assessee in the preceding three years range between 4.29 per cent. to 4.5 per cent. In the year under consideration, the assessee has declared net profit rate of approximately 5 per cent. which is better as compared to the past assessed history.
(ii) The learned counsel also submitted that there was no basis with the AO to make an ad hoc disallowance of 10 per cent out of total expenses. Similarly, there is no valid basis on which the confirmation of disallowance to the extent of 5 per cent by the learned CIT(A) can be sustained. He invited our attention towards the judgment of Hon'ble Calcutta High Court in the case of Oceanic Industries (India) (P) Ltd. vs. CTO (1974) Taxation Law Reports 2385. In this case, it was held that even in making best judgment assessment the CTO has to give a dealer a reasonable opportunity of being heard. It is also implicit that he should give his reasons for arriving at a particular figure for enabling the assessee to appreciate the mental process leading to the assessment. In the present case, the AO and the CIT(A) have not given any reasons for disallowing an ad hoc amount @ 10 per cent and 5 per cent respectively, out of the total expenses. The learned counsel also relied upon the judgments in CIT vs. K. Y. Pilliah & Sons. (1967) 63 ITR 411 (SC), 2 ITC 176 and 5 ITC 159 to further support his contention that no such ad hoc/lumpsum disallowance can be validly made. The AO while making an assessment to the best of his judgment does not possess absolutely arbitrary authority to assess at any figure he likes and though not bound by strict judicial principles, he should be guided by rules of justice, equity and goods conscience. The learned counsel submitted that no such disallowance out of expenses were made in the past. The AO has not given any convincing reasons for disallowing a lumpsum amount out of various expenses. The CIT(A), therefore, ought to have deleted the entire amount of disallowance made out of total expenses by the AO.
(iii) As regards ground No. 4 is concerned, the learned counsel was fair enough to state that the said ground has been incorrectly taken in the grounds of appeal, as the addition made on account of profit on labour escalation charges has been deleted by the CIT(A). Hence, this ground was not pressed by the learned counsel for the assessee. Hence, ground No. 4 is rejected as not pressed.
(iv) The learned counsel thus vehemently argued that addition of Rs. 20,120 made on account of unexplained difference in bank accounts as a result of bank reconciliation statement as well as the disallowance out of expenses confirmed by the CIT(A) to the extent of Rs. 1,67,892 should be cancelled.
9. The learned Departmental Representative strongly supported the order of the CIT(A) and relied upon the detailed reasons mentioned in the assessment order. He submitted that the assessee filed 3 returns of income in which different figures of contract receipts were declared. Even the figures of sundry creditors shown in the statement annexed with the second and third returns differed. He also stated that the assessee's counsel has furnished no explanation with regard to addition of Rs. 20,128 made on account of difference in bank balance. The addition of Rs. 20,128 therefore, deserves to be confirmed.
9.1 The learned Departmental Representative submitted that the assessee has claimed total expenses merely on the basis of estimated figures. The books of accounts and vouchers were not produced before the AO in spite of various opportunities granted to the assessee. In this regard, he invited our attention towards the statement of the managing partner recorded by the AO in which he had clearly admitted that no books of accounts were maintained and the vouchers cannot be produced. He also submitted that this was the first year of assessee's business as is evident from the fact that the assessee's firm was formed w.e.f. 1st April, 1985, as is clear from the answer to question No. 1 in the statement of Shri Gurucharan Singh, managing partner recorded by the AO. Therefore, there was no past assessed history of the assessee's case. He thus strongly urged that the order of the CIT(A) so far as it relates to grounds raised in assessee's appeal should be confirmed.
10. At this stage, the Bench indicated as to why some reasonable rate of net profit on declared contract receipts may not be taken into consideration for ascertaining the reasonableness of disallowances confirmed by the CIT(A). The learned counsel strongly opposed the same on the ground that the Tribunal has no power to adopt a new method of estimating the assessee's income by applying the net profit rate on contract receipts, which in fact was not the mode of computation of taxable income adopted by the AO. He placed reliance on judgment of Hon'ble Delhi High Court in the case of CIT vs. Anand Prasad & Ors (1981) 128 ITR 388 (Del).
11. We have carefully considered the rival submissions made by the learned representatives of the parties. We have also gone through the orders of the learned Departmental authorities as well as all other documents submitted in the compilation to which our attention was drawn during the course of hearing.
12. It is an admitted fact that the assessee did not maintain any books of accounts. Such a fact has specifically been recorded in the assessment order. The correctness of the observations made by the AO in the assessment order in this regard has not been disputed by the learned counsel for the assessee. It is also an undisputed fact that the assessee did not produce before the AO the vouchers or any other documentary evidence to support the correctness of various expenses shown in the P&L a/c submitted along with the returns of income submitted by the assessee. It was, therefore, incumbent upon the AO to have resorted to estimation of profit from the contract business. It is true that the AO while making the best judgment as to make a fair, just and reasonable estimate of income. Such estimation of profit in a fair and just manner could be done by the AO either by applying a net profit rate on the contract receipts or he could also estimate the profit in any other manner which can be regarded as fair and reasonableness. It cannot, therefore, be said that the method of computing the taxable income adopted by the AO while making the best judgments was patently erroneous or invalid. The year under consideration was the first accounting year of the firm. The contention of the learned counsel that the income ought to have been assessed on the basis of past assessed history is therefore, not relevant and justified on the facts of the present case.
13. The contention of the learned counsel that the Tribunal cannot consider the reasonableness of the confirmation of addition of Rs. 20,128 and disallowance of Rs. 1,67,892 out of total expenses confirmed by the CIT(A) on the basis of application of a reasonable net profit rate is also not valid and acceptable. The reliance placed by the learned lawyer on the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Anand Prasad & Ors. (supra) is misplaced as the facts of that case are totally different. The Hon'ble High Court in the aforesaid judgment was considering the question relating to assessability of profit from sale of plots assessed by the AO as business income. The AAC held that the sale of lands did not constitute business and set aside the assessments in respect of the profits from the sale of land. The ITO at that stage did not raise any alternative plea that capital gains arose from the sale of the plots of the lands and had to be taxed. The Revenue preferred appeals to the Tribunal and contended that profits were taxable as capital gains. The Tribunal refused to permit the Department to raise the alternative contention as the ITO ought to have raised it before the AAC. On a reference the Hon'ble High Court held that the alternative contention involved some other amount chargeable to income-tax as capital gains and that was a completely different point. The Tribunal was right in holding that such point could not and should not be permitted to be raised before it. Such a view was taken by the Hon'ble High Court on account of the fact that the alternative contention raised on behalf of the Revenue necessarily required determination of income liable to tax as capital gains under S. 12B of Indian IT Act, 1922, which is a different and distinct head of income than the income from business, profession or vocation. The Tribunal cannot for the first time determine income under a different and separate head of income. The Hon'ble High Court at p. 394 while referring to the judgment of the Hon'ble Supreme Court in the case of Hukumchand Mills vs. CIT (1967) 63 ITR 232 (SC) and CIT vs. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC) observed that in both these cases, a new aspect of the point raised earlier was allowed to be raised before the Tribunal. In the present case, the AO determined the income of the assessee according to his best judgment by making separate additions or disallowances out of various expenses claimed in the P&L a/c. Since the assessee failed to produce vouchers or any other documentary evidence in support of the expenses claimed by the assessee, the AO was fully justified in making a best judgment by choosing to make disallowance out of the total expenses claimed by the assessee against the contract receipts. The Tribunal can certainly consider the reasonableness of such disallowance by taking into consideration the net effect of such disallowances and find out whether the net profit rate finally sustained by the CIT(A) as a result of confirmation of various disallowances can be regarded as fair and reasonable. It is not a case where the Tribunal is considering the assessability of the disputed amount of additions under a separate and distinct head of income. Such an exercise is being made only with a view to ascertain that the disallowances and addition made by the AO and confirmed by the CIT(A) should be restricted to such an amount so that the net income on the contract receipts is determined at a reasonable and just figure of profit from contract business.
14. We will now consider as to how much disallowances confirmed by the CIT(A) should be confirmed so that the net profit from contract business carried out by the assessee is ultimately determined at a fair and reasonable figure of income. In our view, a useful reference can be made to the newly inserted S. 44AD which was inserted by the Finance Act, 1994 w.e.f. 1st April, 1994. The said new section provides for a statutory method of estimating income from the business of civil construction. In cases of assessees whose gross receipts from the contract business do not exceed 40 lakhs. The gross contract receipts means the amount received from the client for the contract and the same will not include the value of material supplied by the client. The income from contract business in such cases will be estimated at 8 per cent of the contract receipts. The aforesaid provisions came into force from 1st April, 1994 and applies in a case where the contract receipts do not exceed 40 lakhs.
Strictly speaking, the said provision does not apply to the aforesaid case which relate to asst. yr. 1986-87 and where the contract receipts are more than 40 lakhs. However, the presumptive rate of net profit of 8 per cent. incorporated in the aforesaid section represents a just, fair and equitable rate of net profit, which can be taken into consideration for determining the income from contract business in a case like that of the present assessee where no books of accounts were maintained and no vouchers or documentary evidence was produced before the AO to support the correctness of the various expenses claimed in the P&L a/c. We are, therefore, of the opinion that it would be just and proper on the facts and circumstances of the present case that the disallowance out of expenses and the additions made by the AO and confirmed by the CIT(A) should be restricted to such an amount which would finally give a net profit rate of 8 per cent on the contract receipts.
14.1 The assessee has declared a net profit of Rs. 1,80,225 in the P&L a/c annexed with the third return of income submitted on 2nd December, 1987. A copy of the said P&L a/c has been placed at p. 10 of the paper-book. This inter alia includes interest received amounting to Rs. 4,550 on the credit side. It was also contended on behalf of the assessee before the CIT(A) that the assessee had given sub-contract to Rawlley Construction Co. in respect of which the contract amount of Rs. 5,11,927 was received. This sub-contract was given on a margin of 2 per cent. The said income from sub-contract @ 2 per cent was also included in the net profit as disclosed in the P&L a/c. Such facts have been recorded by the CIT(A) on p. 4 of the order passed by him. Therefore, the income @ 2 per cent. contract receipt of Rs. 5,11,927 which comes to Rs. 10,238 is also included in the total income of Rs. 1,80,225 shown as per P&L a/c. The point relating to the aforesaid sub-contract has been restored back to the AO by the CIT(A). Therefore, the 2 per cent profit on sub-contract receipts will also have to be deducted from the profit shown as per P&L a/c with a view to arrive at the figure of profit declared by the assessee as per P&L a/c in relation to contracts excluding the contract money received in respect of such sub-contracts. The AO had also estimated profit @ 12.5 per cent. on labour escalation receipt of Rs. 7,74,273 which has been deleted by the CIT(A). This contract receipt will also have to be excluded from the total contract receipts. Therefore, the assessable net profit derived by the assessee in respect of contract work other than the contract money received on sub-contract and labour escalation receipt, can be computed as under :
Rs. Rs.
Profit as per P&L a/c declared by the assessee 1,80,225
(-) Interest income credit in P&L a/c 4,550
(-) 2 per cent income on sub-contracts receipt 10,238 14,788
Income declared by the assessee in respect of ---------
contract work other than sub-contracts and 1,65,437
labour escalation receipts. ---------
Additions confirmed by the CIT(A)
1. Unexplained difference in bank account 20,128
(+) 5 per cent. disallowance out of total expenses 1,67,892
---------
1,88,020
---------
The net profit @ 8 per cent. on the declared
contract receipts can be arrived at as under :
1. Gross contract payments received as per
affidavit dt. 7th December, 1987 of Shri Gurcharan
Singh, managing partner 77,14,382
2. Contract receipts, which was given on sub-contract 5,11,927
3. Labour escalation charges received from Tata
Robins Freser Ltd. 7,76,273
----------
90,02,582
(-) The receipts mentioned in 2 and 3 have to be
excluded in view of the findings given in the
order of the CIT(A). The remaining contract
receipts will come to 77,14,382
(-) Cost of materials supplied by the clients 39,42,065
----------
Net Contract receipts 37,72,317
----------
Net profit @ 8 per cent. on the aforesaid amount comes to 3,01,784
(-) Income declared by the assessee in the P&L
a/c relating to the aforesaid contract receipts
as calculated hereinbefore 1,65,437
----------
Additions and disallowance should be confirmed
to the extent of 1,36,347
----------
15. In view of the aforesaid facts, we are of the considered opinion that it would be just and proper to restrict the disallowance and additions confirmed by the CIT(A) to the extent of Rs. 1,36,347 as against the additions and disallowance confirmed by him to the extent of Rs. 1,88,020 comprising of Rs. 1,67,892 out of expenses and Rs. 20,128 in respect of difference in bank reconciliation. The AO is directed to grant relief accordingly.
16. In the result, the appeal is partly allowed.