Income Tax Appellate Tribunal - Mumbai
Mahesh Enterprises , Mumbai vs Department Of Income Tax on 24 June, 2009
आयकर अपील य अ धकरण "बी" यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI ी संजय अरोड़ा,लेखा सद य एवं ी अ मत शु ला, या यक सद य के सम ।
BEFORE SHRI SANJAY ARORA, A.M. AND SHRI AMIT SHUKLA, J.M. आयकर अपील सं./I.T.A. No.5059/Mum/2009 ( नधारण वष / Assessment Year: 2006-07) Asst. CIT - 15(2), Mahesh Enterprises Room No.113, Matru Mandir, Tardeo, Uman Shikhar, 13th Road, बनाम/ Grant Road, Mumbai-400 007 Behind Khar Telephone Exchange, Vs. Mumbai-400 052 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAKFM 2800 J (अपीलाथ /Appellant) : ( यथ / Respondent) & या प े सं./C.O. No.56/Mum/2010 ( नधारण वष / Assessment Year: 2006-07) Mahesh Enterprises Asst. CIT - 15(2), th Uman Shikhar, 13 Road, Room No.113, Matru Mandir, Behind Khar Telephone Exchange, बनाम/ Tardeo, Grant Road, Mumbai-400 052 Vs. Mumbai-400 007 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAKFM 2800 J ( या ेपक /Cross Objector) : ( यथ / Respondent) राज व क ओर से/Revenue by : Shri O. P. Singh नधा रती क ओर से / Assessee by : Shri K. Shivaram सनु वाई क तार ख / : 29.07.2013 Date of Hearing घोषणा क तार ख / : 18.09.2013 Date of Pronouncement 2 ITA No. 5059/M/09 & CO No.56/M/10 (A.Y. 2006-07) Mahesh Enterprises आदे श / O R D E R Per Sanjay Arora, A. M.:
This is an Appeal by the Revenue and Cross Objection by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-XV, Mumbai ('CIT(A)' for short) dated 24.06.2009, partly allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2006-07 vide order dated 04.12.2008.
2. The issue involved in the present appeal is the invocation of section 145(3) of the Act, and the estimation of the income consequent thereto. It will be relevant to recount the facts of the case. The assessee, a partnership firm, is a civil contractor, executing contracts for labour as well as on labour plus material basis. For the year under consideration, the assessee's accounts revealed a net profit of Rs. 54.47 lacs on a gross receipt of Rs. 443.87 lacs, including Rs. 82.95 lacs against labour contract/s. The assessee was observed in the assessment proceeding to be not maintaining any stock register, though had shown opening stock (of materials) at nil and closing stock at Rs 87596/-. There was as such no record or manner to verify or ascertain the consumption of materials. The purchases for the period 01/4/2005 to 07.06.2005 (Rs. 24.70 lacs), when compared with the sales up to 09.06.2005, i.e., Rs. 82.94 lacs, yielded a material cost ratio at 29.77%, i.e., even if the closing stock as on 09.06.2005 were to be, though highly improbable, assumed at nil. This was at a significant variance with the overall material consumption rate of 52.05%, while that for the second period, i.e., 10.06.2005 to 31.03.2006, worked to even higher at 58.7%. The assessee sought to justify its book results on the basis of its aggregate statistics i.e., overall material consumption of 52.07% and net profit rate at 12.86%.
The assessee's explanation was that it had not been maintaining any stock register since inception, so that this was a regular feature of the 'method of accounting' being followed. In fact, a bill for Rs.37.80 lacs, dated 09.06.2005, to M/s. Dhairyawan 3 ITA No. 5059/M/09 & CO No.56/M/10 (A.Y. 2006-07) Mahesh Enterprises Developers (which stands included in the sale of Rs. 82.94 lacs for the period up to that date), was an advance bill, so that same is to be excluded while computing the consumption rate for the first period. Doing so would inflate the material consumption rate for the first period to 54.7%. Not impressed, the Assessing Officer (A.O.) invoked sec. 145(3) of the Act. The material consumption was assumed by him at 36% (excluding VAT at 4.52%), working out the excess consumption at Rs.40,66,771/-. The closing stock as at the year-end (31.03.2006) was taken at equivalent to one month's purchase; that for March, 2006 being at Rs.16.90 lacs. Excluding the value of the stock as disclosed, the difference in closing stock was calculated by him at Rs.16.02 lacs plus VAT (@ 4.52%). The gross addition made was for Rs.74,25,295/-, which, being arithmetically incorrect, was subsequently rectified in pursuance to a rectification moved by the assessee to that effect.
The same did not favor with the ld. CIT(A) in appeal. The A.O. had ignored the overall book results and proceeded on the basis of an irrelevant classification, i.e., Period 1 and Period 2; applying a 3-month ratio (Period 1) to the nine-month ratio (Period 2). It could well, i.e., with equal justification, be the opposite, so that the ratio of Period 2 could be applied to Period 1. Though a difference had been found out by him, all that could be said is that the matter required further investigation, which was not carried out by the A.O., deciding the matter superficially, in a cryptic fashion, without pursuing the same to its logical end. The assessee had, besides contract receipt, labour receipt at Rs.82.95 lacs. The genuineness of the purchases had not been questioned, and in fact even otherwise verified by the A.O. by issuing summons/requisition to all the creditors. As such, the matter could only be decided on the basis of past and/or future results. The net profit rate for the immediately preceding and the immediately succeeding year are much lower, at 7.9% and 8.3% respectively. The entire addition was, accordingly, deleted by him (refer para 5 of the impugned order).
Aggrieved, the Revenue is in appeal before us, while the assessee's cross- objection thereto is largely supportive, emphasizing the non-acceptance of the assessee's explanation qua the bill to M/s. Dhairyavan Developers being an advance bill.
4 ITA No. 5059/M/09 & CO No.56/M/10 (A.Y. 2006-07)Mahesh Enterprises
3. We have heard the parties, and pursued the material on record. 3.1 The first issue before us is the validity of the invocation of sec. 145(3) of the Act by the A.O. We find no infirmity therein. The assessee is admittedly not maintaining any stock register, so that there is no basis to verify the material consumption, which constitutes a very significant part of its operating cost. Not only that, it is admittedly following the 'method' of writing off its purchases for the year to the operating statement, treating the same as 'consumed'. Now there is no basis to state that the material is actually consumed as soon as it is purchased, or that the assessee maintains no inventory thereof. The accounts as maintained are thus admittedly inconsistent with the actual, obtaining state of affairs, which the books of account of any entity or enterprise are supposed to reflect. There is no basis whatsoever, either in law or in accountancy; the law only upholding the accepted principles of commercial accounting, for the said concocted and/or arbitrary method of accounting being followed by the assessee. That the method has been followed from year to year, does not in manner mitigate the defect, or justify its adoption. The assessee's books of account, as maintained, are thus not amenable to yielding correct operating results, so that the same stand rightly not accepted by A.O., applying sec. 145(3).
3.2 The next issue before us is the estimation of income. The assessee's books of account having been found as not reliable in explaining the disclosed book results, depending upon that derived there-from, as, say, for Period 1, in determining the overall profit rate, would be incorrect. There is also no question, thus, of applying the material consumption rate for or over one period during the year to another. Further, though therefore the question of applying the ratio of Period 2 (nine-month) to Period 1, as stated by the ld. CIT(A), does not arise, there is even otherwise no scope for the same. This is as the logic for the reverse is that if the production is possible at a lower material consumption for one period (Period 1), it ought to be so for the other period/s as well (or at least would need to be justified), so that the opposite would not hold. Further, the A.O. has in fact not, as claimed by ld. CIT(A), applied the ratio of one period to another; the 5 ITA No. 5059/M/09 & CO No.56/M/10 (A.Y. 2006-07) Mahesh Enterprises consumption rate for the first period being at 30% (approx.), as against the applied average rate for the year of 36%, i.e., at 25% higher, implying an even higher ratio for Period 2. Also, how and on what basis, one may ask, does the A.O. recast the assessee's profit and loss account? Rather, if it could be validly so done, the same ought to have been recast by the first appellate authority himself.
There is again no merit in the argument qua a comparison with the assessee's book results for the other years. This is for two reasons. The said books, similarly maintained, i.e., as for the current year, are equally unreliable. Secondly, a significant proportion of the assessee's profit for the year comes from labour contract receipt; the ratio of which would vary from year to year. To give a broad and proximate view, assuming the labour to constitute 25% of total output value, the work corresponding to the labour receipt would be Rs. 332 lacs, as against Rs. 361 lacs in respect of labour plus material contract/s, i.e., almost at par for the current year. No meaningful comparison across different years could be made de hors such receipt.
Continuing further, we also find no basis in the A.O.'s estimation of material consumption at 36%. Equally unjustifiable is his separate addition toward closing stock, which arises as a by-product to the finding of an actual lower material consumption. In fact, neither any separate addition can be sustained nor there is any warrant for allowing the assessee, as claimed by it, credit for the closing stock. The assessee would also have, similarly, opening stock, which has to be necessarily taken into account in determining the profit for the year. In fact, the opening stock being taken at nil, i.e., the value of the closing stock as reflected and accepted for the immediately preceding year, no opening stock for the year could be taken without first sustaining an addition toward the same under section 69/69A of the Act.
3.3 Section 145(3) mandates for making the assessment in the manner as provided in sec. 144, i.e., according to the best judgment of the assessing authority, taking all the relevant material into account. The assessee has relied on case law, i.e., Kesharbhai Ghamarbhai Chaudhary vs. ITO [2011] 141 TTJ (Ahbd) (UO) 94, to the effect that 6 ITA No. 5059/M/09 & CO No.56/M/10 (A.Y. 2006-07) Mahesh Enterprises under the circumstance of rejection of books of account, the prescription of sec. 44AE; the assessee in that case being a transport operator, is a good guideline for the purpose of estimation of income. The presumptive provision in the case of civil contractors is section 44AD, which provides for a net profit rate of 8%. The matter is purely factual, though the prescribed presumptive statutory rate, applicable for assessees with a turnover of up to Rs. 40 lacs, without doubt provides a good guideline. The apex court in Brij Bushan Lal Purdhuman Kumar vs. CIT [1978] 115 ITR 524 (SC), approved a profit rate of 10%. The Tribunal has in such cases upheld profit rates varying from 8% upwards to as much as 20%, or even higher. In our view, a net profit rate of 10% on the assessee's contract receipt of Rs.360.86 lacs, i.e., involving material consumption, would be a reasonable estimate. Qua its labour receipt of Rs. 82.95 lacs, we consider a net profit rate of 20%, in view of a much lower base, as appropriate under the given facts and circumstances of the case. The A.O. is directed to work out the assessee's income for the year by applying the said percentages. No other addition is sustainable. We decide accordingly.
3.4 As regards the assessee's cross objection, we find it to have no legs to stand on, in view of our having upheld the rejection of the assessee's accounts under sec. 145(3) of the Act. In fact, there is no basis to state that the bill to M/s. Dhairyawan Developers was an advance bill. Again, the CO, it would be noted, is rendered largely inconsequential in view of our upholding a profit rate marginally over (i.e., 2%) the presumptive profit rate u/s. 44AD of 8%, being pleaded by the assessee itself, while, firstly, the disclosed profit rate is itself close to 13% and, secondly, the difference in the material consumption rate and, thus, in the profit rate, on the account of the said bill is as much as about 25%. The assessee's C.O. is, therefore, wholly without merit. We decide accordingly.
7 ITA No. 5059/M/09 & CO No.56/M/10 (A.Y. 2006-07)Mahesh Enterprises
4. In the result, the Revenue's appeal is partly allowed, and the assessee's cross objection is dismissed.
प रणामतः राज व क अपील आं शक वीकृत, और नधा रती क या ेप खा रज क जाती है ।
Order pronounced in the open court on September 18, 2013 Sd/- Sd/-
(AMIT SHUKLA) (SANJAY ARORA)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मुंबई Mumbai; दनांकDated : 18.09.2013
Roshani
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु त(अपील) / The CIT(A)
4. आयकर आयु त / CIT - concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई /
DR, ITAT, Mumbai
6. गाड फाईल / Guard File
आदे शानस
ु ार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai