Income Tax Appellate Tribunal - Amritsar
The Hafiz Construction Company Pvt ... vs Income Tax Officer, Ward 3(1), Srinagar on 5 November, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
AMRITSAR BENCH, AMRITSAR.
BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER
AND SH. N. K. CHOUDHRY, JUDICIAL MEMBER
I. T. A. No. 435/(Asr)/2017
Assessment Year: 2012-13
Hafiz Construction Co. Pvt. Ltd. Vs. Income Tax Officer,
Ma Link Road, Munnawarabad, ITO-Ward 3(1) Raj Bagh Srinagar
Srinagar Kashmir- 190001
[PAN: AACCH 0486J]
(Appellant) (Respondent)
Appellant by : Sh. Bashir Ahmad (C.A.)
Respondent by: Sh. Gautam Deb (D.R.)
Date of Hearing: 08.08.2018
Date of Pronouncement: 05.11.2018
ORDER
Per Sanjay Arora, AM:
This is an Appeal by the assessee directed against the Order by the Commissioner of Income Tax (Appeals) Jammu ('CIT (A)' for short) dated 15.03.2017, partly allowing the assessee's appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter), dated 27.03.2015 for Assessment Year (AY) 2012-13.
2. At the outset, it was observed that the assessee's appeal is delayed a period of 19 days. The parties were heard on the condonation of the said delay (copy of the condonation petition dated 07.08.2018 on record), and finding the assessee's explanation as reasonably explaining the same, the appeal was admitted, and the hearing in the matter proceeded with. The assessment has been framed after 2 ITA No. 435/Asr/2017 (AY 2012-13) Hafiz Construction Co. Pvt. Ltd. v. ITO regarding the assessee's books of account as not reliable, invoking section 145(3) of the Act. The assessee's case in this regard is that as no specific defects have been detected in the books of account produced during the assessment proceedings, its' accounts cannot be rejected (Gd. 2). In any case, the flat rate of 7% on gross receipt (of Rs.1639.52 lacs), in view of its' accounts being duly audited, reflecting the net profit rate of 0.27%, is arbitrary (Gd.3). Lastly, the assessee contends that the application of a net profit rate of 10% on other income (Rs.15.18 lacs), up from at 8% by the Assessing Officer (AO), is excessive, particularly considering that the same has been without affording any opportunity to the assessee to explain its' case in the matter (Gd. 4). We shall proceed in seritam.
3. A perusal of the assessment order shows that the assessee had, despite being allowed several opportunities during the assessment proceedings, failed to substantiate its' case with regard to the claim of purchases (claimed at Rs.1212.60 lacs), salary & wages (Rs. 213.05 lacs), financial cost (Rs.66.46 lacs), direct expenses (Rs. 30.43 lacs), administrative expenses (Rs. 69.58 lacs), debited to its' profit and loss account for the year. Even the claim of depreciation (Rs. 49.42 lacs) was not verifiable as the nature of the additions to the fixed assets were not explained or substantiated by furnishing the necessary details/documentary evidences. No details were submitted even with regard to the unsecured loans despite being called for time and again during the assessment proceedings. The correctness and completeness of the assessee's accounts was, under the circumstances, not verifiable and, accordingly, merited rejection, i.e., in view of the non-furnishing of the necessary details and documentary evidences in support of the various claims made by the assessee per its' return of income. Before, however, proceeding to invoke section 145(3), and despite notices u/s. 142(1) having been issued on earlier occasions, as on 08/9.05.2014; 02.12.2014;
3 ITA No. 435/Asr/2017 (AY 2012-13)Hafiz Construction Co. Pvt. Ltd. v. ITO 05.12.2014, as well as opportunities through order-sheet entries, a final show cause notice u/s. 142(1) was issued on 03.02.2015 for making an assessment u/s. 144 by the AO, reproduced at pgs. 3-8 of the assessment order. Apart from a part reply dated 19.01.2015 (in response to the requisition per order-sheet entry dated 12.01.2015), seeking adjournment (which was granted) for the balance acquisitions, no reply had been received from the assessee. Further, the assessee had not furnished the stock register for the relevant year as well as the monthly statement of the work-in-progress (WIP), as also the quantitative details of the major constituents - on a monthly basis; copy of the bank account giving the narration of the amounts received/ credited. This was particularly relevant as the assessee's accounts disclosed a unreasonably low profit. Drawing the assessee's attention to the decision in Action Electrical v. CIT [2003] 258 ITR 188 (Del), and rejecting the argument for application of the rate of 6.5%, as held fair and reasonable by the Hon'ble High Court of Jammu & Kashmir in case of a contractor, the AO applied a rate of 8% on the gross receipt by relying on the decision in Shivam Construction Co. v. Asst. CIT (in ITA Nos. 383 and 384/Chd/2004 and Ors.) which stands confirmed by the Hon'ble Punjab & Haryana High Court (in ITA No. 183 of 2007, dated 14.05.2007). In doing so, he, however, accepted the assessee's argument that the amount deducted on account of 'Departmental Stores' (Rs.237.31 lacs) and sales-tax (Rs.152.91 lacs), be reduced while reckoning the gross receipt, which was accordingly taken at Rs.1264.48 lacs, i.e., as against the book figure of Rs.1639.52 lacs, and a net profit rate of 8% applied, computing the assessable income at Rs.101.06 lacs. In appeal, the ld. CIT(A) found no reason not to uphold the said rejection in view of the clear failure on the part of the assessee to produce the books of account and other details as well as the documentary evidences, viz. bills and vouchers, to substantiate its' various claims. The assessee, however, claiming to be operating in remote areas of 4 ITA No. 435/Asr/2017 (AY 2012-13) Hafiz Construction Co. Pvt. Ltd. v. ITO Srinagar, where the profit margins are low due to hard weather conditions and intermittent stoppage of work, leading to higher cost of input and labor, he reduced the profit rate from 8% to 7%, i.e., as decided by the jurisdictional ITAT Bench in the case of Construction Engineers, Srinagar (in ITA No. 493/Asr/2010, dated 11.05.2012), where a profit rate of 7%, subject to no further allowances, was confirmed. The assessee, apart from contract work, is also trading in pipes, yielding a turnover of Rs.15.18 lacs, on which a profit rate of 10% was accordingly estimated by him. Aggrieved, the assessee is in second appeal.
4. Before us, the thrust of the arguments by the ld. Authorized Representative (AR), the assessee's counsel, Sh. Bashir Ahmed Lone, was that it was wholly incorrect to say that the assessee had not furnished the necessary information, and toward which he would draw our attention to the assessee's reply dated 19.01.2015 (PB pgs. 1-2) and 12.02.2015 (i.e., in response to the final show cause notice dated 03.02.2015 (PB pgs. 3-4). The AO, if sincere, ought to have reproduced or at least discussed the assessee's said replies which were perused during hearing. To a query by the Bench with regard to the maintenance of stock record, it was submitted that the same is not maintained even as the quantitative detail of the closing inventory, valuating closing stock as per generally accepted accounting principles, stood enclosed.
5. We have heard the parties, and perused the material on record. 5.1 The first thing that strikes one in the instant case is the non-maintenance of any stock records. As explained in S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC), keeping a stock register is of great importance because that is a means of verifying the assessee's accounts by having a 'quantitative tally'. If, after taking into account all the material, including want of a stock register, it is found that from the method of accounting the correct profits of the business are not 5 ITA No. 435/Asr/2017 (AY 2012-13) Hafiz Construction Co. Pvt. Ltd. v. ITO deducible, the operation of section 145(3) of the Act would be attracted. Valuation of closing stock, which therefore includes its' quantity as well, on which the per unit rate is to be applied, is again integral to any accounting process (Investment Ltd. v. CIT [1970] 77 ITR 533 (SC)). The assessee's accounts must, therefore, yield not only the quantity held in stock as at the end of the accounting year, but also the cost of production (i.e., excluding indirect costs) at which the same, where less than sale realization, is to be adopted to arrive at the correct profits of the business, even as emphasized by the Hon'ble Apex Court in, among others, CIT v. British Paints India Ltd.[1991] 188 ITR 44 (SC); Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC). Both these elements are missing in the present case.
5.2 The issue before us is if the assessee's accounts can, under the given facts and circumstances, be regarded as yielding correct operating results, i.e., is the true profit (or, as the case may be, loss) of the assessee's business deducible there-from, implying the accounts being correct and complete. We think not, in the absence of any quantitative reconciliation qua material inputs, which constitute, without doubt, the most significant proportion of the assessee's production (construction) cost. This becomes even more obtuse in view of the extremely low profit rate, for which no explanation is forthcoming, and which ought to in fact arise from the assessee's accounts themselves. That is, apart from the fact that no stock register is maintained - and which itself is a serious infirmity considering that materials are assigned to different projects, and therefore becomes a necessary adjunct to keep an account thereof, the fact of the matter is that each contract contains specifics of the various materials to be used. The structural and other, viz., design, details of each deliverable, which cannot but be specified, would determine the quality and quantity of the various material inputs therefor. No information thereon is forthcoming, so that there is no manner in which the reliability of the assessee's 6 ITA No. 435/Asr/2017 (AY 2012-13) Hafiz Construction Co. Pvt. Ltd. v. ITO accounts with regard to the material cost, as debited and claimed in accounts, can be verified. Mere production of purchase vouchers, i.e., assuming so, would by itself not justify the incurring of the material cost as claimed, which can only be on the basis of the material consumption, and which in turn could only be with reference to the construction undertaken and billed or otherwise taken into account, as by way of closing stock. Rather, the very fact of the assessee having claimed the purchase cost without substantiating the user of the corresponding material on its' contract/s, i.e., to the extent claimed, so as to claim its set off against contract receipt, is reason enough or ground for regarding the assessee's accounts as not liable for verification, for which the assessee has, as afore-stated, not adduced any corroborative or ancillary data/material as well.
5.3 The matter, it needs to be appreciated, is primarily factual. The absence of quantitative details, correlating it with the project parameters, is a serious structural defect in the assessee's accounts. The accounts cannot, for that reason, it needs to be appreciated, lead to correct cost determination and, thus, the true operating results of the business. Apart from direct cost (of construction), we do not think that any serious objection has been raised by the Revenue qua the other costs, i.e., specifically speaking; the minor defects not warranting a resort to s. 145(3). We emphasize on cost as the Revenue has not expressed any doubt with regard to suppression of receipt in the present case. The extremely low profit rate/s - with, excluding the 'other income' resulting in a loss (negative profit), for which there could be valid reason/s, has to have its' explanation in the assessee's accounts. And which are presumed to be correct and complete, faithfully recording the transactions as well as the valuations of various assets and liabilities, unless they are shown to be not so and, therefore, the said explanation/s not forthcoming there- from. The onus in this regard is on the Revenue. We have, on the balance, found 7 ITA No. 435/Asr/2017 (AY 2012-13) Hafiz Construction Co. Pvt. Ltd. v. ITO the assessee's accounts to be not shown by it to be not correct and complete except to the extent and in-so-far as they do not exhibit or record the basis for the claim of the material cost, nor indeed the basis of valuation of inventory, with the opening and closing inventory (of WIP) being, rather queerly, (almost) the same. We, therefore, upholding the rejection of accounts, under the circumstances, consider it proper that the matter is restored back to the file of the AO to enable the assessee an opportunity to justify its' operating results with reference to the material cost. If there is, as normally obtains, a correspondence between material and labor costs, the two would though require being considered in tandem. The opening and closing WIP, valuation of which is also to be validated (refer: British Paints India Ltd. (supra)), may also stand to be corroborated by other relevant materials and surrounding circumstances viz., the running account/s with the contractee/s, which is normally prepared before raising any bill; the periodic reports generated, etc. The AO shall adjudicate per a speaking order, issuing definite findings of fact, after allowing the assessee a reasonable opportunity of being heard. We may clarify that we would have, rather than remitting the matter, ourselves applied the profit rate of 6.5% (on contract receipt), i.e., as proposed by the assessee during assessment proceedings. The only consideration that prevails with us, constraining us from doing so, is that the assessee's accounts have been found as not reliable principally with regard to material cost, so that it is the gross (trading) margin that ought to have been and, accordingly, is to be estimated and applied. The Revenue has not expressed any serious doubt in respect of the indirect costs, and which would therefore stand to be allowed as claimed, of course subject to any statutory disallowance/s, if any. The AO shall base his decision on all relevant materials, duly confronting the assessee therewith, as also apply separate profit rates on contract receipt and pipe sales, i.e., in case the trading profit on the latter is also not, as appears to be, determinable with reference to the books of account. The 8 ITA No. 435/Asr/2017 (AY 2012-13) Hafiz Construction Co. Pvt. Ltd. v. ITO assessee's results for the preceding years, subject of course to the impact of the changes in input and output prices, would also be relevant where the relevant accounts are not similarly imbued with defect/s as found for the current year.
5.4 We decide accordingly.
6. In the result, the assessee's appeal is allowed for statistical purposes.
Order pronounced in the open court on November 05, 2018
Sd/- Sd/-
(N. K. Choudhry) (Sanjay Arora)
Judicial Member Accountant Member
Date: 05.11.2018
/GP/Sr. Ps.
Copy of the order forwarded to:
(1) The Appellant: Hafiz Construction Co. Pvt. Ltd.
Ma Link Road, Munnawarabad, Srinagar Kashmir- 190001
(2) The Respondent: Income Tax Officer, ITO-Ward 3(1) Raj Bagh Srinagar (3) The CIT(Appeals) Jammu (4) The CIT concerned (5) The Sr. DR, I.T.A.T. True Copy By Order