Income Tax Appellate Tribunal - Pune
Accurate Electrical Co, vs Assessee on 18 May, 2012
THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
ITA No. 579/PN/10
(Asstt. Year: 2006-07)
M/s Accurate Electrical Co. .. Appellant
A-1, Paranjape Housing Society,
Madhavnagar Road, Sangli
PAN AADFA0815A
Vs.
Jt. Commissioner of Income-tax, .. Respondent
Range-2, Sangli
Appellant by : Shri M K Kulkarni
Respondent by : Shri Alok Mishra
Date of hearing : 18.05.2012
Date of pronouncement : 25.05.2012
ORDER
PER G.S. PANNU, A.M.:
This appeal by the assessee is directed against the order dated 30.3.2009 passed by the Commissioner of Income-tax (Appeals), Kolhapur, which in turn, has arisen from the order dated 26.12.2008 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short "the Act"), pertaining to the assessment year 2006-07.
2. In this appeal, the assessee has raised multiple Grounds of appeal. However, essentially the appeal has been prosecuted on two issues relating to
(i) invoking of section 145(3) of the Act and rejecting the book results and making an addition of Rs 10,80,758/- on this count, and (ii) invoking of section 2 40(a)(ia) of the Act and to make a disallowance of Rs 9,05,772/- for non- deduction of tax at source under section 194C of the Act. The other Grounds raised by the assessee, namely, Ground Nos. (1) and (2) relating to selection of the assessment for scrutiny as per CBDT instructions, Ground No. 4 relating to disallowance under section 40A(3) of the Act have not been pressed at the time of hearing and are accordingly dismissed. Similarly, Ground Nos. (6), (7), (8) and (9) being general in nature do not require any adjudication and are accordingly dismissed.
3. We may first take up for consideration the dispute relating to the addition of Rs 10,80,758/- on account of low gross profit after rejection of the book results by invoking section 145(3) of the Act. In brief, the facts are that the assessee is a partnership firm engaged in the business of electrical equipment erection and construction contracts. For the year under consideration, the assessee filed a return of income declaring a total income of Rs 15,79,560/-. The return of income so filed was accompanied by the audited accounts, prescribed audit report under section 44AB of the Act, etc. The said return was subject to a scrutiny assessment in the course of which the Assessing Officer required the assessee to explain the reasons for low gross profit vis-à-vis the net profit during the year in comparison to the earlier assessment years of 2003-04, 2004-05 and 2005-06. The assessee explained the reasons which were to the effect that in this year a new activity of supply of materials was carried out which was hitherto not done in the past; that unlike the past, in this year assessee had earned 50% of the total receipts from sub- contracting business where the profit margin is lower; that in this year the contracts executed were of private companies whereas in the past years it was of Government undertakings and the profit margin in the case of private sector contracts was lower; and, that gross turnover in this year had doubled and, hence lower profit margin. The Assessing Officer considered the 3 submissions of the assessee and found in particular that the assessee had incurred site expenses of Rs 51,13,893/-, which were not at all incurred in any of the earlier assessment years and further that the labour payments of Rs 62,62,166/- showed an abnormal increase to 28.97% as compared to 14.92% and 20.23% in assessment years 2003-04 and 2004-05 respectively. It was explained that site expenditure was incurred in this year as the assessee had executed electrical work of windmill at Bramhanwel, Dhulia District, which was a remote place in a hilly and forest area. As the labour and supervising staff deputed to this area was provided with all facilities, the expenditure incurred was on a higher side and that in any case in the past years no such site work was undertaken. The assessee also explained that the labour payment was on a higher side on account of the nature of work carried out in this year. The Assessing Officer considered the submissions of the assessee and found that the site expenses of Rs 51,13,893/- were supported by only self-made vouchers and was also not satisfied with the explanation with regard to the abnormally high labour expenses incurred. Considering the submissions of the assessee, the Assessing Officer came to the conclusion that the book results were required to be rejected under section 145(3) of the Act, as there was non-maintenance of proper account books, evidences/documents could not be furnished in respect of various expenses on the ground that due to flood, papers were not available and further having regard to unverifiability of labour expenses as well as the site expenses incurred in this year. For all these reasons, he therefore deemed it fit to estimate income by adopting an additional gross profit at 5% of the contract receipts of Rs 2,16,15,157/- which came to Rs 10,80,758/-. This was in addition to gross profit percentage of 12.63% declared by the assessee. Accordingly upon rejection of the book results, the addition of Rs 10,87,758/- was thus made.
4
4. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has upheld the action of the Assessing Officer of rejecting the book results. In particular, the following discussion in the order of the Commissioner of Income-tax (Appeals) is worthy of notice:
"In the audit report, the auditors made various qualifications which have a bearing on the income of the appellant, e.g. (i) work-in-progress at the end of the year was not physically verified by them, (ii) for expenses like draft commission, miscellaneous expenses, transportation, travelling, site expenses, salary, hamali, office expenses, site engineer payment, vehicle repairs, etc only home vouchers were on record, (iii) provision as on 31.3.2006 of site expense nd labour charges payable is made on ad hoc basis, (iv) personal expenses debited to profit & Loss account in respect of maintenance of vehicle and petrol cannot be found out. Considering all these facts, the action of the AO in ejecting the books of account and estimating the gross profit cannot be found fault with. Therefore, all the grounds of appeal relating to this issue are dismissed."
5 Against the aforesaid action, the assessee is in further appeal before us.
6. Before us, the learned Counsel for the assessee submitted that both the lower authorities have unjustly rejected the book results by invoking section 145(3) of the Act. It was submitted that the assessee had undertaken the contracts in the year under consideration which were not similar to the contracts executed in the earlier years. The said explanation has been wrongly rejected so as to hold the book results as unreliable. Notwithstanding the aforesaid, the learned Counsel further pointed out that the addition made by the lower authorities is quite excessive, inasmuch as even if the income is to be estimated after rejection of books of account, the estimation is to be made only of the net income and not the gross profit as done by the Assessing Officer. In this manner, the orders of the authorities below are sought to be assailed.
7. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below in support of the case of the Revenue, 5 in particular the portion of the order of the Commissioner of Income-tax (Appeals), which we have extracted above.
8. We have carefully considered the rival submissions. Section 145(3) of the Act empowers an Assessing Officer to make an assessment to the best of his judgment as provided in section 144 of the Act, if he is not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub-section (1) of section 145 or the accounting standard notified in sub-section (2) of section 145 have not been regularly followed by the assessee. In this case, ostensibly the provisions of section 145(3) have been invoked by the Assessing Officer on not being satisfied about the correctness and completeness of the accounts of the assessee. The said action has since been upheld by the Commissioner of Income-tax (Appeals). The primary reason weighing with the Assessing Officer to hold the book results as unreliable is on account of incurrence of site expenses of Rs 51,13,893/- which was unverifiable as it was entirely based on self-made vouchers. Secondly, the labour payments of Rs 62,62,166/- was also found abnormally increased to 28.97% in comparison to 14.92% and 20.23% incurred in assessment year 2003-04 and 2004-05 respectively. We find that apart from the aforesaid, the Commissioner of Income-tax (Appeals) has found certain deficiencies, which portion we have already extracted above.
9. On all these aspects, we find that no credible and convincing explanation has been rendered by the assessee. While the assessee is justified in asserting that site expenses have been incurred particularly in this year on account of execution of a contract at a remote place which was not done so in the past, yet the substantiation of incurrence of such expenditure has not been carried out by the assessee either before the Assessing Officer or even before the Commissioner of Income-tax (Appeals).Additionally, the 6 Commissioner of Income-tax (Appeals) has brought out points which we have extracted above, which show that there are infirmities in the accounts maintained by the assessee. We may also note here that in so far as the points brought out by the Commissioner of Income-tax (Appeals) is concerned, there is no argument set-up before us. Considering all these, in our view, section 145(3) of the Act has been correctly invoked by the Revenue authorities in this case.
10. Now we may come to the quantum of income determined by the Assessing Officer after rejection of the book results. On that account, we find that the estimation is quite excessive and unjustified. Having regard to the discussion in the order of the Assessing Officer, we find that the main objection was in relation to the expenses incurred on account of site expenses and labour payments. Considering the aforesaid aspects and also past history wherein level of profits declared by the assessee are not so huge, we deem it fit and proper that an addition of Rs 5,00,000/- would suffice to plug the leak of revenue, if any, on this account. Therefore, to that extent, assessee succeeds and we accordingly set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to delete the balance addition of Rs 5,80,758/- made on this count. Thus, on this count, assessee partly succeeds.
11. The only other Ground argued by the assessee before us relates to the disallowance made by the Assessing Officer invoking section 40(a)(ia) of the Act on the ground that deduction of expenses on account of labour charges, and tractor rent have been claimed without deduction of tax a source under section 194C of the Act. On this Ground, the primary position taken by the appellant before us is that the entire expenditure has been actually paid out and, therefore, provisions of section 40(a)(ia) are inapplicable. Apart therefrom, the learned Counsel has also pointed out that in relation to the expenditure on tractor rent of Rs 4,18,678/-, it was a case of payment of lease 7 rental for machinery and no tax was liable to be deducted under section 194-I of the Act and in his regard, reliance was placed on the decision of the Tribunal in the case of 143 TTJ 415 (Del.) Further, reliance has been placed on the decision of the Special Bench of the Tribunal in the case of Merilyn Shipping & Transports v. Addl. CIT 70 DTR (Visakha)(SB)(Trib) 81. It is sought to be pointed out that the entire expenditure in question has been actually paid out and therefore, even if there was a default in deduction of tax at source under section 194C, disallowance under section 40(a)(ia) cannot be made having regard to the ratio of the judgment of the Special Bench in the case of Merilyn Shipping & Transports (supra)
12. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below in support of the case of the Revenue.
13. Having considered the rival submissions on this aspect, we deem it fit and proper to remit the matter back to the file of the Assessing Officer for a decision afresh. In our view, the remand is necessitated in view of the subsequent decision of the Special Bench in the case of Merilyn Shipping & Transports (supra) whereby it has been laid down that the disallowance under section 40(a)(ia) shall be limited to only such expenditure which is found payable as on 31st March of the year and not to expenditure which has otherwise been actually paid during the year itself. The said proposition laid down by the Special Bench was not available at the time of determination of the assessment by the Assessing Officer and we, therefore, deem it fit and proper that the same be considered by the assessing authority to evaluate the correct tax liability of the assessee. Needless to mention, in the remand proceedings, the assessee shall also be eligible to substantiate its claim before the assessing authority that it was not liable to deduct tax at source on any of the impugned payments so as to escape from the rigors of section 40(a)(ia) of the Act. We, therefore, set aside the order of the Commissioner of 8 Income-tax (Appeals) on this aspect and restore the matter back to the file of the Assessing Officer to be adjudicated afresh as per law. As a result, on this aspect, the assessee partly succeeds.
15. In the result, the appeal of the assessee is partly allowed.
Decision pronounced in the open Court on 25 th day of May, 2012.
Sd/- Sd/-
(I C SUDHIR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated 25 th May, 2012
B
Copy to:-
1) Accurate Electrical Co. Sangli
2) Jt.CIT R-2 Sangli
3) The CIT (A) Kolhapur
4) CIT Kolhapur
4) DR, "B" Bench, I.T.A.T., Pune.
5) Guard File
True copy By Order
Sr. PS, ITAT Pune