Delhi High Court
Cit vs Winner Constructions Pvt Ltd on 3 May, 2012
Author: Sanjiv Khanna
Bench: Sanjiv Khanna, R.V. Easwar
$~2
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision : 3rd May, 2012.
+ ITA 796/2011
CIT ..... Appellant
Through Mr. Deepak Chopra, sr. standing
counsel
versus
WINNER CONSTRUCTIONS PVT LTD ..... Respondent
Through Mr. Satyen Sethi and Mr. Arta a
Trana Panda, Advs.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA,J: (ORAL)
Revenue has preferred this appeal under Section 260A of the
Income Tax Act, 1961 („Act‟, for short) impugning the order dated
6.8.2010 passed by the Income Tax Appellate Tribunal („Tribunal‟, for
short) in the case of Winner Constructions Pvt. Ltd. The appeal pertains
to assessment year 2006-07.
ITA 796/2011 Page 1 of 10
2. While issuing notice on this appeal vide order dated 31 st May,
2011, the notice was limited to the following question of law:
"Whether the Tribunal erred in deleting the trading addition
of Rs.42,88,000/- made by the AO after rejecting the books
of accounts?"
3. We have heard counsel for the parties and proceed to dictate our
decision.
4. The Assessing Officer rejected the books of accounts inter alia
recording the following reasons :
(1) The net profit of 1.28% declared by the assessee was low in
comparison to prescribed profitability of 8% in Section 44AD of the Act.
(2) The real net profit was Rs. 2,76,592/- against the total turnover of Rs.
10,71,93,334/-. Thus percentage of net profit was 0.25%, which is low.
Ms/ Unibuild Engineering and Construction Co. (P) Ltd. assessed in
Circle-18(1) had declared GP rate of 6.44% and net profit of 5.97% on a
turnover of Rs.42.27 crores.
(3) Project wise books of accounts were not produced.
(4) Closing stock was not properly disclosed.
(5) There were unaccounted outstanding balance.
5. The first two reason recorded by the Assessing Officer by
themselves do not justify rejection of the books of accounts. Low gross or
ITA 796/2011 Page 2 of 10
net profit may be a ground or reason to conduct a detailed and thorough
investigation and verification, but on stand alone basis cannot be a ground
for rejecting the books. Gross profit or net profit rate can vary from year
to year depending on favourable or unfavourable factors and market
conditions. There can be a fall or reduction in gross profit but this by
itself is not a good reason to reject the books. Books results or additions
to gross profits cannot be made on the sole or mere fact that the profits are
low. This cannot be the circumstance or material alliunde to make
estimation of profits. [See Pundit Brothers versus Commissioner of
Income Tax, (1954) 26 ITR 56 (Pun.)] System of accounting adopted by
an assesse cannot be rejected on the ground that the gross profit disclosed
in the books was low, in comparison with others in the same line of
business. Low profit with other defect can justify rejection of books,
Therefore, we have to examine the three reasons given by the Assessing
Officer recorded above to determine whether or not the books of accounts
were rightly rejected, but without ignoring the low profit rate.
6. With regard to the reason No.1, the assessee had given the
following explanation to the Assessing Officer at the time of assessment :
"Project wise details.
It is already on record that company is executing various
Government projects at difference places and the same are
managed by the common staff of the company. The
company is maintaining complete record of direct expenses
is respect of each - of the project and overhead and
ITA 796/2011 Page 3 of 10
administrative expenses which are centrally controlled as
common expenses of the various projects and same are
accounted for in the books of accounts and duly supported
and verifiable on the basis of evidence and vouchers. There
is thus no infirmity in the maintenance of project wise
details. Even otherwise, it is a case of the company with
common directors, common finance and common control and
as such all these projects are part of the business activities
and there is no legal or accounting requirement for
maintenance of the independent record of each of the
projects. The same system has been in existence in
preceding years and as such the technical objection of the
Assessing Officer is irrelevant, out of context and without
any basis. Further, it is not the case of the Assessing officer
that the receipt or expenses recorded in respect of the
business activities are incorrect or unverifiable and as such
technical objection is of no relevance. All the receipts are
fully supported on the basis of TDS certificates and there is
no dispute in respect of the same. Further, the Assessing
Officer has not recorded any finding or adverse observation
about direct or indirect expenses and as such there is no case
of any dispute or deficiency in respect of the same.
Reference has also made in respect of communication dated
26.12.2007 relating to maintenance of project wise details
and the same reproduced hereunder:-
"Maintenance of project wise books of accounts is not
mandatory as per Income Tax Act. We are maintaining
books of account in Tally package which is a widely used
accounting package. Since our present administration system
is centrally controlled, hence accounting system is also not‟
maintained project wise. Our present system of account is
such that the site supervisors maintain petty cash account for
their respective sites which alone- is allocated project wise
and all other direct expenditure for project is maintained
centrally similarly, all indirect expenses are maintained
ITA 796/2011 Page 4 of 10
centrally. As we are following mercantile system of account,
there is no deficiency in our accounting system. Hence there
is no reason for invoking section 145."
(The above quoted paragraph have been taken from the order of the
CIT(Appeals), as the Assessing Officer only reproduced the last para of
the aforesaid submission in the assessment order.)
7. We may record here that the ld. counsel for the appellant-Revenue
had submitted before us that the books of accounts maintained by the
assessee were not produced. We do not find any merit in the said
contention as this is not alleged or recorded in the assessment order. Ld.
counsel for the appellant has drawn our attention to the noting dated
19.12.2007 mentioned in the assessment order. We have examined the
said noting. A careful reading shows that the Assessing Officer had
observed that the assessee was maintaining separate stock register
quantity-wise for each site, therefore the assessing officer had observed
that the assessee could prepare profitability details of each site on the
basis of the said register. The assessee‟s stand as noticed above was clear
that they were not maintaining separate books of accounts for each site
and this was not mandatory under the Act. They were maintaining
separate stock register quantity-wise and there was a supervisor who used
to maintain petty cash account for each site. All direct and indirect
expenses were maintained centrally. The books of accounts were
maintained on consolidated basis. This aspect was examined by the CIT
ITA 796/2011 Page 5 of 10
(Appeal) in detail. The CIT(Appeals) also examined the original
assessment records and has recorded as under :
"3.8 I have carefully considered the issue in dispute in the
light of observation made in the assessment order and
submission of the appellant. As regards the issue of non
production of books- of accounts and in the light of various
communications of the appellant and affidavit of the
Chartered Accountant, I have called for the assessment
record and it is noticed that the Assessing Officer has not
mentioned in any of the hearing, claimed by the appellant,
for production of books of accounts, that books of accounts
were not produced and as such the contention of the
appellant that books of accounts were produced is supported
from the affidavit of the Chartered Accountant and letter dtd.
26112/07. However, the basis of addition is not in the
context of production or non production of the books of
accounts but in respect of various general observations made
by the Assessing Officer regarding project wise details,
closing stock and unconfirmed balances. It appears that
Assessing Officer has made only general observation as in
the assessment year 2003-04. I have gone through the
appellate order for 2003-04 and it is noted that issue of
trading addition was examined in respect of these very
objections and appeal of the appellant was allowed and
accordingly the appellate order for assessment year 2003-04
is relevant and applicable to the facts of the case for this year
also. Further, I have gone through the detailed submission of
the appellant in respect of various issues raised by the
Assessing Officer and it is noticed that these were only
general observation by the Assessing Officer but no other
mistake or irregularity was pointed out. There is no dispute
or any finding by the Assessing Officer that system of
accounting is not in conformity with the past history and
there is any change in system and as such the technical
ITA 796/2011 Page 6 of 10
objection about project wise details have no relevance in the
light of past history. It was also clarified in the written
submission before the Assessing Officer that details of direct
expenses of the project were maintained and administration
and other overhead expenses were recorded in the books of
head office and as such the project wise details were also
available for verification. In the light of above facts, there is
no justification of the Assessing Officer to draw adverse
inference and to reject the books of account to make estimate
in respect of trading results. Further, as the accounts were
maintained in conformity with the past history and in the
absence of any specific mistake or irregularity, there is no
ground to dispute correctness of trading results on the basis,
of this issue."
The findings recorded by the CIT(Appeals) have been affirmed by
the Tribunal.
8. The aforesaid findings recorded by the appellate authority are
factual and Revenue has not been able to show on what basis or reason
the same can be challenged/questioned.
9. The second aspect pertains to failure to show closing stock of six
projects, out of the nine projects. The Assessing Officer has mentioned in
the assessment order that closing stock for only 3 sites namely,
Indrapuram site, IOCP Panipat and APMC Azadpur was disclosed. The
CIT(Appeals) in the appellate order has recorded that the assessee had
pointed out that three project sites were complete and final payments had
been received by end of the assessment year. The stand of the assessee
before the Assessing Officer was that there was no stock at the sites at
ITA 796/2011 Page 7 of 10
Greater Noida, CPWD, Papan Kala and NBCC as on 31.3.2005. The
Assessing Officer has not referred or examined these facts in the
assessment order. With regard to the three other projects namely Delhi
Jal Board, IGNOU Maidan Gari and EPI, Lodi Road projects, the assessee
had stated that the work for Delhi Jal Board was completed in the year
2003-04 and only small quantity of extra work was executed. There was
no stock lying on the site as on 31.3.2005. Similarly, in the case of
IGNOU the work was almost complete in November, 2004 and no stock
was lying on the site on 31.3.2005. For EPI, Lodhi Road site work, 98%
R/A bill was submitted in January, 2005 and payment of the same was
received during the year. There was no stock lying at the site. The
balance work was executed in the next financial year. The CIT(Appeals)
accordingly deleted the said addition.
10. The Assessing Officer has not mentioned and referred to the stand
of assessee in the assessment order and dealt with the same. In these
circumstances we do not find any error in the order of the Tribunal
accepting the plea of the assessee and rejecting the appeal filed by the
Revenue.
11. The last aspect raised by the Revenue pertains to
unclaimed/unaffirmed balances. In the assessment order the Assessing
Officer has stated that balances of some parties had remained
unconfirmed. The Assessing Officer has not given full details/ particulars
of the said parties who had not confirmed the balances. He referred to the
ITA 796/2011 Page 8 of 10
notice sent to Dhanishta Builders under Section 133(6) of the Act. Two
alleged discrepancies in the balances of Vardhaman Traders and
Dhanishta Builders were recorded. Against Vardhaman Traders there was
balance of `3,17,012/- but no purchases were made. Dhanishta Builders
had an opening balance of `4,81,894/- and a closing balance of
`20,55,135/-, but no confirmation was filed. Assessment order records
that on 19.12.2007, the assessee was asked to furnish confirmation and the
case was adjourned to 26.12.2007. The assessee on 26.12.2007 replied
that they require more time to secure confirmation. It was further stated
that copy of the bank accounts was being produced to establish that
payment was made by cheque. The assessment order was passed on
28.12.2007.
12. The CIT(Appeals) in the order has mentioned that they were 7
parties and the assessee had furnished confirmations from the said 7
parties. Details and particulars are mentioned in the order passed by the
CIT(Appeals). He has recorded that Vardhaman Traders were paid during
the assessment year and there was no closing balance. With Dhanishta
Builders, the assessee had a running account. Opening balance was
`4,81,894/- and closing balance was `20,55,135/- and the confirmations
etc. was furnished before the Assessing Officer.
13. In our opinion the Tribunal was justified and right in dismissing the
appeal of the Revenue in view of the aforesaid factual position.
ITA 796/2011 Page 9 of 10
14. The aforesaid question of law is answered in affirmative i.e. against
the appellant revenue and in favour of the assessee. The appellant-
Revenue will be pay cost of `10,000/- to the assessee.
SANJIV KHANNA, J.
R.V.EASWAR, J. MAY 03, 2012 Vld/Bisht ITA 796/2011 Page 10 of 10