Rajasthan High Court - Jaipur
Ansari Builders vs Income Tax Officer on 28 February, 2000
Equivalent citations: (2000)66TTJ(NULL)902
ORDER
B. M. Kothari, AM These cross-appeals, one by the assessee and the other by the revenue are directed against the order dated 27-4-1994 passed by the Commissioner (Appeals) for assessment year 1991-92.
2. The assessee has raised the following ground in their appeal :
"Because the appellate authority erred in sustaining the addition of Rs. 7,07,336 to the declared income by applying a net profit rate of 10 per cent on the contract receipt from MES amounting to Rs. 72,14,922. The appellant on the oral instructions of MES authorities executed extra work for which a claim of Rs. 16,00,260 was made but the MES authorities made payment of Rs. 9,33,000 only and did not make payment for the balance Rs. 6,67,260 with the results that the entire profit was reduced by Rs. 6,67,260. If this amount had paid net profit rate would have been much higher. The expenditure in fact had been incurred for which there are complete details and the entire expenditure is completely vouched. The contention of the authority that the signature of the payees have been obtained on the printed vouchers of the appellant is no good ground for non-acceptance of payment. And further contention of the assessing authority that there are 75 per cent vouchers in respect of transportation expenses, site expenses, assessing expenses and pairs of vehicles is absolutely incorrect. The addition made is unwarranted and at any rates excessive. "
3. The revenue has raised the following ground in their appeal "On the facts and in the circumstances of the case the learned Commissioner (Appeals) has erred in directing to allow depreciation to the assessee without appreciating the fact that the assessing officer has applied moderate net profit rate of 10% with the specific mention that the element of depreciation is covered therein and the learned Commissioner (Appeals) has himself held in his order dated 9-5-1994. In Appeal No. 343/94-95 in the case of Shri Ratan Singh Gehlot that net profit rate of 11 per cent inclusive of depreciation and all other expenses is reasonable."
At the outset the learned counsel appearing on behalf of the assessee submitted that so far as the ground raised by the revenue in their appeal is concerned, it is squarely covered against the department by the decision of Rajasthan High Court in the case of CIT v. Jain Construction Co. (1999) 156 CTR (Raj) 290. Faced with this situation, the learned Departmental Representative submitted that the department has not accepted the decision of the Rajasthan High Court and, therefore, it would like to keep this matter alive.
4. We have considered the submissions made by the learned representatives of both the parties and have perused the judgment of the Hon'ble Rajasthan High Court (supra). The Hon'ble High Court has referred to the circular issued by the Board dated 31-8-1965 and has held that such beneficial circulars are binding on the departmental authorities. In the said circular it was clarified that where it is proposed to estimate the profit and the prescribed particulars in respect of depreciable assets have been furnished by the assessee, depreciation allowance should be separately worked out. The net profit should be estimated subject to allowance of depreciation and the depreciation allowance should be deducted therefrom. Relying on the said circular, the Hon'ble High Court has directed the departmental authorities to allow, inter alia, assessee's claim for depreciation. The view taken by the Commissioner (Appeals) so far as it relates to ground raised by the revenue is concerned, is fully supported by the judgment of the Hon'ble Rajasthan High Court. We, therefore, do not find any merit in revenue's appeal.
5. Shri Vikas Balia, the learned advocate appearing on behalf of the assessee submitted that the ground raised by the assessee deserves total acceptance. He submitted that the assessee has continued its contract work with the Garrison Engineer (AF) Bhuj, involving construction of residential accommodation, etc, The assessee has shown gross receipt on contracts at Rs. 96,90,690 and work in progress of Rs. 30,000. The gross profit shown by the assessee at Rs. 3,48,677 and net profit shown is Rs. 13,876. After deducting the cost of material supplied by MES amounting to Rs. 24,76,768 the net contract receipt comes to Rs. 72,14,922. The assessing officer has observed that the net profit of Rs. 13,896 shown by the assessee on contract receipts of Rs. 72,14,922 giving a net profit rate of 0.19 per cent is ridiculously low in this line of contract work. The learned assessing officer has also relied upon the net profit rate of 7.47 shown by the assessee on net contract receipt of Rs. 52,13,242 shown in the preceding year. Shri Balia, the learned advocate, submitted that the explanations for such low net profit shown by the assessee given before the assessing officer and Commissioner (Appeals) have not been properly considered. It was explained before the learned departmental authorities that the assessee has maintained proper books of account and that all the entries recorded therein are supported by vouchers, wages registers, etc. The assessing officer, therefore, should compute the assessee's income as per books of account in accordance with section 145(1). There is no material on record, which can justify application of proviso to section 145(1) or section 145(2) in the present case. As regards low net profit rate, a specific explanation was given that the assessee on the basis of oral instructions of MES authorities executed extra work for which a claim of Rs. 16,00,260 was made, but the MES authorities made payment of Rs. 9,33,000 only and did not make payment for the balance of Rs. 6,67,260. If this amount of Rs. 6,67,260 would have been paid by the MES authorities, the net profit rate in the year under consideration would have been matching with the net profit rate of the preceding year.
6. The learned counsel submitted that the assessee is following hybrid system of accounting. The expenditure is accounted for on accrual basis but the contract receipts are accounted for on receipt basis. He relied on the judgment of Hon'ble Patna High Court in CIT v. Chanchani Bros. (Contractors) (P) Ltd. (1987) 161 ITR 418 (Pat). Shri Balia is submitted that the expenditure incurred by the assessee for carrying out the extra work on the basis of oral instructions of MES authorities, is allowable in the year under consideration. The assessee is also legally entitled to account for the income in respect of amount of Rs. 6,67,260 as and when it is actually received. The assessee did not account for any amount of work-in-progress attributable to the balance amount of Rs. 6,67,260, as the assessee's claim had not been approved by the MES authorities and, therefore, it was not required to be shown as work-in-progress from the point of view of a prudent businessman. Tax can be levied only on real income and not on an amount which has been claimed by the assessee from the awarder of the contract, but that has not yet been accepted by them. The learned counsel also pointed out that the dispute with the MES authorities is real and substantial which is evident from the fact that an arbitrator has now been appointed for resolving the said dispute vide letter dated 29-10-1998, a copy of which has been placed at p. 13 of the paper book.
7. Shri Balia, then submitted that the assessing officer rejected the books of account and applied the provisions of section 145(2) in view of the various observations made in his order. It has been mentioned by the assessing officer that certain expenses referred to in para 8 are not supported by the bills issued by the persons from whom such material was purchased. Signatures of those persons have been obtained on the printed voucher forms maintained by the assessee. The addresses of those persons have not been given. He pointed out that this is a prevailing practice in the contract business. The vouchers for sand, bajri, bricks, blocks tiles, etc. are often not given by the suppliers as they are petty dealers or petty contractors. In such event, their signatures are obtained on the vouchers. The assessing officer did not require the assessee to furnish addresses of these persons from whom such purchases were made. In any case, the total amount referred to in para 8 in relation to such purchases comes to Rs. 3,83,315 which is quite negligible in view of the volume of contract work carried out by the assessee. The assessing officer has further pointed out that vouchers for expenditure of Rs. 2,218 and Rs. 6,440 were not available. The non-availability of vouchers only in two cases out of hundreds of vouchers aggregating to Rs. 8,658 cannot justify the rejection of books of account. Likewise the third point mentioned by the assessing officer is that the vouchers in respect of transportation expenses, site expenses, messing expenses and repairs of vehicle are available only to the extent of 75%. The total amount of such expenses comes to Rs. 1,56,416. Even assuming that the assessing officer's observation is right, 25% of such expenses comes to less than Rs. 40,000. The assessing officer has further observed that voucher for Rs. 4,000 in respect of advertisement expenses is also not available with the assessee. The learned counsel pointed out that all these so called defects pointed out in para 8 indicate insignificant and points about the non-availability of vouchers about obtaining signatures on printed vouchers and forms instead of obtaining regular bills from those persons. The total amount of instances mentioned in para 8 is very small and meagre, which by no stretch of imagination can justify the rejection of the book results, as all other vouchers recorded in the books have been found to be completely verifiable. The assessee has maintained proper books of accounts and has followed recognised method of accounting. Therefore the rejection of book results by the assessing officer is not proper and valid. The learned counsel relied upon the decision of the Tribunal, Jaipur in Uttam Chuna Pathar Udyog v. Income Tax Officer (1998) 65 ITD 460 (Jp) and in the case of Ajanta Construction Co. (P) Ltd. v. Assistant Commissioner 22 TW 606. Shri Balia then strongly urged that the declared income from contract should be accepted as true and correct. The learned Departmental Representative strongly supported the order of the Commissioner (Appeals), He submitted that application of 10% net profits rate after granting depreciation is most reasonable and justified. The assessing officer has pointed out various defects for rejecting the assessee's books of account. The assessee cannot maintain its accounts on such a hybrid system that expenses are accounted for on mercantile basis while the receipts are accounted for on receipt basis. Profits or income of the relevant year cannot properly be deduced from such a method of accounting. The assessee should have therefore included the amount of Rs. 6,67,260 claimed as recoverable from MES authorities or in the least a substantial part thereof should have been shown as work-in-progress in the credit side of contract account. The assessing officer was, therefore, fully justified in applying net profit rate of 10% on the facts of the assessee's case.
8. We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned departmental authorities. We have also carefully gone through all the documents submitted in the compilation, to which our attention was drawn during the course of hearing. We have also carefully gone through the various decisions cited by the learned representatives of both the sides.
9. The assessee filed a return declaring income of Rs. 15,156. The said return is annexed with an audit report in the prescribed form under section 44AB of the Act. The income has been assessed by the assessing officer at Rs. 7,22,492. The figure of addition stained by the Commissioner (Appeals) as mentioned in the assessee's grounds of appeal to the tune of Rs. 7,07,336 seems to be the difference between the figure of assessed income and income declared by the assessee (7,22,492-15,156). Since the Commissioner (Appeals) has directed the assessing officer to grant depreciation as claimed by the assessee, and such a relief granted by the Commissioner (Appeals) has been upheld by us in earlier part of this order, the addition confirmed by the Commissioner (Appeals) which can be the subject-matter of assessee's appeal will only be Rs. 6,30,511 (7,07,336 depreciation allowed by the Commissioner (Appeals) Rs. 76,825). It is, therefore, clear that the addition made on account of application of net profit rate by the assessing officer and confirmed by the Commissioner (Appeals) comes to Rs. 6,30,511, The assessing officer has given various instances of expenses which are not fully supported by vouchers or which are not supported by proper vouchers. The assessing officer has also pointed out other defects and has relied upon the past history of assessee's case. He has specifically mentioned that the assessment for the immediately preceding year i.e. 1990-1991 was completed under section 143(3) and the assessing officer had applied net profit rate of 10% subject to allowing depreciation. The assessee did not file any appeal against the assessment for assessment year 1990-91. The accounts for the year under consideration have been maintained by the assessee in similar manner as that of the preceding year. After careful consideration of the entire facts we are of the view that a resort to estimation of profit by invoking the proviso to section 145(1) may be justified on the facts of the present case. However, an estimate has to made in a just and fair manner. The assessing officer has to take into consideration the specific facts and explanations furnished by the assessee, which according to him justifies the decline in the net profit rate as compared to the net profit rate of the preceding year.
10. As against the addition of Rs. 6,30,511 made by the assessing officer on account of application of net profit rate of 10% (after considering depreciation) the assessee submitted that the decline in profit in the year under consideration had occurred on account of non-acceptance of assessee's claim by MES authorities for extra work done pursuant to their oral instructions to the tune of Rs. 6,67,260- If this specific explanation given by the assessee is found to be acceptable, the same will adequately explain the reasons for decline in net profit and will also adequately cover the amount of addition of Rs. 6,30,511 made by the assessing officer and confirmed by the Commissioner (Appeals).
11. The assessee submitted a bill for such extra work done by them to the MES authorities for an amount of Rs. 16,00,260 which was approved by them only to the extent of Rs. 9,33,000. The assessee gave a specific note below the profit & loss account submitted along with the return of income. The said note reads as under :
"In the contract work AA No. CAAZ/BHUJ/11 of 1989-90 construction of certain married accommodation at Bhuj, the firm has claimed a sum of Rs. 16,00,260 for the work done as per detailed dated 21-3-1991. Against claim of Rs. 16,00,260 the Garrison Engineer (AF), Airforce Station, Bhuj, Kutch *(work in charge) has approved only a sum of Rs. 9,33,000 and no payment has been made for the balance work done."
The assessing officer in para 10 of his order has given some reference to the letter received from MES pursuant to some letters sent by the assessing officer. The MES department stated that the assessee has not done any extra work and hence no amount was withheld by the department. The contractor has signed the bill under protest since the contractor has made a superfluous claim vide contractor letter dated 26-8-1992, it was outside the scope of work and were deleted from the bill. The assessee in reply to the aforesaid letter of MES produced the relevant copies of the bills and records before the assessing officer as discussed in para 12 of the assessment order. The dispute relating to non-approval of the assessee's claim for extra work to the tune of Rs. 6,67,260 seems to be real and substantial as is apparent from the fact that the army authorities have appointed an arbitrator vide letter dated 29-10-1998. The assessee has incurred expenditure for carrying our such 'extra work pursuant to oral directions of the MES authorities, for which the contractor claimed Rs. 16,00,260. Out of the said amount, the MES authorities approved and paid Rs. 9,33,000. This also shows that the extra work was, in fact, done and certain expenditure was incurred by the assessee. The dispute relates to the balance amount of Rs. 6,67,260.
12. Therefore the question which arises for our consideration is that whether the assessee should have shown the income of Rs. 6,67,260 for which a bill had been given by the assessee to MES authorities in the year under consideration or the assessee could validly contend that income in respect of such unadmitted claim will be shown in the year when it is actually received. The next question which is connected with the aforesaid question and which also requires our consideration is whether the expenditure incurred for carrying out such extra work in the year under consideration should be claimed in the year when the amount in question is received or it should be allowed in the year under consideration in view of the fact that expenses are accounted for by the assessee on accrual basis in the hybrid system of accounting followed by them. The Hon'ble Patna High Court in the case of Chanchani Bros. (supra) has held as under :
"(ii) That in relation to the extra work done by the assessee, the Tribunal found that claims were not based on a prior agreement or undertaking. They were disputed items. The Tribunal had given a clear finding that the decision about these claims had not been made before the close of the accounting period in question. The amount of Rs. 23,06,079 could not be added to the assessee's income for the assessment year 1970-7l."
The Hon'ble High Court has further held as under :
"It also cannot be doubted that in the mercantile system the expenses are allowable when the expenses are incurred and it cannot be postponed as the contract work is one whole work and so the expenses incurred in a particular year has to be allowed on the mercantile system of accounting."
The judgment of Hon'ble Patna High Court in the case of Chanchani Bros. (Contractors) (P) Ltd. (supra) was distinguished by the Hon'ble Patna High Court in the case of Jaiswal Ceramic Industries v. CIT (1988) 169 ITR 454 (Pat). At p. 463, the Hon'ble High Court referred to the judgment of Hon'ble Supreme Court in the case of State Bank of Ravancore v. CIT (1987) 158 ITR 102 (SC) that the actuality of the situation may make a difference in accrual of income. If the actuality of the situation is not accepted, the conclusion may be well founded. While distinguishing the decision in the case of Chanchani Bros. (supra) the Patna High Court observed that in that case the Irrigation Department of State Government did not admit the bills, though the bills were prepared for the work done. The Tribunal had clearly pointed out that the assessee had made bills, as yet, in respect of such bills, it was the system of the assessee that the assessee used to show only when the claim was accepted in principle by the government or authorities concerned. If the assessee had not followed a special pattern in maintenance of accounts, i.e., in entering the same only when the government accepted the bills, things would have been different, but as the assessee was following a particular pattern of accounting, his claim ought to be judged in that background. That was the actuality of the situation in the case of Chanchani Bros (supra). The Hon'ble Patna High Court in the case of Jaiswal Ceramic Industries (supra) relying upon the judgment of Hon'ble Supreme Court in A. Krishnaswamy Mudaliar (1964) 53 ITR 122 (SC), observed as under at p. 464 of 169 ITR :
"In the words of Hidayatullah J. in the case of CIT v. A. Krishnaswamy Mudaliar (1964) 53 ITR 122, 127 (SC) this was one of the examples of maintenance of accounts on a hybrid or a heterogeneous system. The pattern of execution of works and payments therefor by the Irrigation Department is that the bills are not prepared by the contractor himself but they are prepared by the departmental officers themselves which is signed by the assessee. Thus until any item has been approved, no bill is prepared for the contractor. Not having lodged the bill the assessee may very well contend that the value of the work done had not accrued to him as his income. In the case of CIT v. Chanchani Bros. (1987) 161 ITR 418 (Pat) the assessee had made a large number of claims and most of the claims were not admitted by the government. In fact most of the claims were either withdrawn by the assessee himself or were rejected by the appropriate authority. In that situation, the mere lodging of bills itself would certainly amount to a mere claim. The preparation of the bills amounts to lodging of the claims as well as accepting them. Thus the Patna decision proceeded upon its own special facts which were entirely different from the present one. It can, therefore, be of no assistance to the assessee."
13. In the present case, the assessee has maintained its books of account on hybrid system. The contract receipts are accounted for only when the bills are accepted by the a warder of the contract and the same is paid to the assessee. The contract receipts are thus accounted for on the basis of actual receipt. The claim of the assessee in respect of extra work done was not accepted by the MES authorities to the extent of Rs. 6,67,260. Therefore, the assessee was not liable to account for the amount of Rs. 6,67,260 as its income for the year under consideration in conformity with the method of accounting consistently followed by them. The assessee is also entitled to grant of deduction in respect of entire expenses incurred in relation to extra work done by them in the year under consideration, as the expenses are accounted for by the assessee on accrual basis in accordance with the method of accounting, namely, hybrid system consistently followed by the assessee. In view of the aforesaid facts and findings, we are of the view that the aforesaid specific explanation given by the assessee that the net profit rate declared in the year due to non-acceptance of the assessee's claim for extra work done to the tune of Rs. 6,67,260 ought to have been accepted by the learned departmental authorities. After acceptance of this explanation, if the income shown by the assessee in the year under consideration is compared with the net profit shown in the preceding year, it will be found that the decline in net profit that stands properly and fully explained. We would, however, like to observe that as and when the assessee receives the amount from MES authorities towards such extra work done out of their claim for Rs. 6,67,260 or higher amount including commission and interest etc. such receipt should be shown as income and not a part of contract receipt of that particular year in which the amount may be received. This finding is being given with a view to ensure that such receipt of extra work done in the year under consideration, when it is received after a gap of more than 9/10 years, will represent net income of that year, as the deduction in respect of corresponding expenditure for such extra work done has been allowed in the year under consideration. With these observations, we direct the assessing officer to accept the declared income from contract business of the assessee in the year under consideration.
14. Before parting, we would like to place on record our feelings of appreciation for an admirable representation made by Shri Vikas Balia, the learned young advocate.
15. In the result the assessee's appeal is allowed and that of revenue is dismissed.