Income Tax Appellate Tribunal - Jaipur
Kalindee Rail Nirman (Engineers) Ltd. vs Joint Commissioner Of Income Tax on 5 September, 2002
Equivalent citations: (2003)78TTJ(JP)653
ORDER
B.R. Jain, A.M.
1. This appeal preferred by the assessee arises from the order dt. 1st Jan., 1999, of the learned CIT(A), Rajasthan-I, Jaipur, for the asst. yr. 1995-96.
2. Various grounds raised by the assessee relate to the controversy of application of net profit rate of 11 per cent thereby estimating the income at Rs. 2,23,38,143, non-deduction of interest amounting to Rs, 38,06,090 as business expenditure from the profit so estimated, addition of Rs. 13,34,308 as income from business activity not disclosed besides charging of interest under Section 234B and non-entertainment of two additional grounds as regards amortisation of preliminary expenses and allowance of Rs. 8,20,091 from interest income of public issue by the learned CIT(A).
3. An action under Section 132(1) was carried on the appellant on 14th March, 1995, and books of accounts and various documents were found and seized. The appellant is engaged in the business of undertaking the works contract project of Indian Railways on turnkey basis having specialisation in installation of colour light signalling system at the railway stations. The assessee also has undertaken the activity of manufacturing and sale of EPABX system at Jaipur in the year under consideration. The return of income has been filed declaring an income of Rs. 88,91,700. The accounts are audited and were accompanied by report of auditors. As per audited accounts, the assessee disclosed a net profit rate of 3 per cent which the AO has assessed at 11 per cent by rejecting the books of account under Section 145(2) of the IT Act. Depreciation has been allowed thereon but claim of deduction of interest has been denied to the assessee. The learned CIT(A) has given a finding that after being cornered by the Department, the appellant agreed to an application of net profit rate of 11 per cent and thus the estimation of income at Rs. 2,23,38,143 has been upheld by him and also disallowance of deduction of interest of Rs. 38,06,090 has been confirmed.
4. The learned counsel Shri O.P. Agarwal appearing for the appellant contends that the appellant is a widely-held public limited company engaged in the electro engineering works for Indian Railways since inception. The company came into existence on 15th Feb., 1984. The job carried out by the appellant is highly technical and subject to rigorous quality control for human safety. The facts are identically the same to the earlier years and there has been no change in the system of accounting and this business of the appellant. The AO has arbitrarily and unilaterally proceeded in adopting an exorbitant net profit rate of 11 per cent. No effort has been made by him to compare with the appellant's own results for earlier years. A detailed paper book has been filed containing 291 pages and reference was drawn to paper book p. 1 which contains a chart showing analysis of contract receipts as well as the income declared and net profit rate earned by the assessee. There has been no application of Section 145 prior to asst. yr. 1993-94 and the book version has been accepted by the Department. The assesses maintains a hybrid system of accounting which is evident from paper book pp. 123 to 127. Loose papers seized were for earlier years also i.e., 1993-94 and 1994-95 and rate applied in those years by the AO having the same jurisdiction is 7 per cent whereas the rate applied in this year is 11 per cent. The assessee has separately disputed the application of the said rate of 7 per cent which is pending in appeal before the learned GIT(A) for both the years i.e., asst. yrs. 1993-94 and 1994-95 whereas the book result for earlier years at 3.8 per cent and 3.2 per cent have been accepted by the Department under scrutiny assessment. During the year under consideration, there has been tremendous increase in the turnover from Rs. 14.88 crores in asst. yr. 1994-95 to Rs. 20.30 crores in the relevant year despite there has been a heavy increase on cost of materials used for execution of contracts besides heavy competition. The appellant had worked on 19 sites spread over at small, places located at even in jungles and is managed by 4 whole-time directors having 300 employees and more than 3,000 workmen engaged through the contractors. The AO relied only on two documents for discarding the books of accounts maintained by the appellant and for applying an exorbitant high net profit rate of 11 per cent. These are appraisal report prepared by the Directorate of Investigation Income-tax, and audit report procured under Section 142(2A) of the IT Act. The AO himself has given a finding that appellant could justify only a few transactions but remaining not. The details of the same have not been brought on record by him. He has also not brought on record the total payment about whom he was not satisfied or not given by the appellant. A reference was drawn to the order sheet entry dt. 7th Aug., 1998, etc. The learned counsel vehemently argued that audit was not carried in a proper manner. Certain areas were not covered by the audit and so much so the vouchers and other relevant material from which the AO's queries could be satisfied were lying seized by the Department but neither the AO cared to supply the same to the auditors nor the auditors felt duty-bound to take inspection thereof from the Department before furnishing report of the special audit. The AO offered to apply a net profit rate more than 11 per cent but the assessee gave a conditional proposal which was not acted upon by the Department. Such an offer, therefore, made by the assessee is of no consequence. The provisions of Section 145(2) also could have not been applied in this case as the assessee has maintained regular books of account duly supported by vouchers. The allegation of extortious payment is unfounded and was unauthorised. The detailed replies have been filed before the AO for the queries raised by him with respect to the auditors' report. Reference has been drawn to all the replies, more particularly at paper book pp. 112, 114 and also Departmental paper book at p. 5. The allegation of mobilisation money is also without any basis as the said amount never came to the appellant but was charged by the Railways themselves, The amount of expenses alleged to be not supported by vouchers is also without any basis and the interest given and expenses are duly accounted for and supported by vouchers and have been incurred for the purpose of business. The allegation that the amounts have been channelised for promoter's quota is also without any basis inasmuch as the document reveal that the withdrawals have been made much after the date when the public issue had already been oversubscribed. In fact, it was further contended that the AO himself was satisfied on several accounts and had not listed or quantified any item about the genuineness of which he was not satisfied. A finding has been given by him and this is wrong to contend that the rate applied by him at 11 per cent has been agreed by the assessee. The learned CIT(A) has thus erred in giving such a finding. The learned counsel further contended that interest has not been allowed as normal business expenditure by relying on the decision of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions v. C1T (1998) 232 ITR 776 (AP), since the second part of this decision also at p. 777 is in favour of the assessee. The Hon'ble Rajasthan High Court in the case of CIT v. Jain Construction Co. & Ors. (2000) 245 ITR 527 (Raj) has decided the issue in favour of the assessee. Besides this, the assessee has also filed a list of cases on the ground of rejection of books of account and rate application as under-;
International Forest Co. v. CIT (1975) 101 ITR 721 (J&K).
Low Profits only no reason for rejecting books of account Shri Ram Arora v. CIT (1971) 80 ITR 78 (All).
Expenditure claimed not actually incurred cannot be basis for rejecting books of accounts.
Uttam Chuna Pathar Udyog v. ITO (1998) 65 ITD 460 (Jp).
Simply, a clerical error, lack of some vouchers, non-maintenance of a particular record does not per se render the accounts incorrect.
M. Durai Raj v. CIT (1972) 83 ITR 484 (Ker).
Low rate of profit declared in comparison to others is no reason for rejection of books.
R.B. Jessaram Fetehchand (Sugar Dept.) v. CIT (1970) 75 ITR 33 (Bom).
The account books of an assessee cannot, therefore, be rejected and an assessment made under Section 13 of the IT Act, 1922, merely on the ground that the addresses of the assessee are not mentioned in the case of cash transactions.
H.S. Builders v. TTO (1996) 86 Taxman 214 (Jp)(Mag)......... (sic) Whether history of assessee's case itself was a guide in applying rate of profit and, therefore, CIT(A) was not justified in enhancing rate-Held, yes.
P. Venkanna v. CIT (1969) 72 ITR 328 (Mys).
Other things being equal, profits estimated during an earlier period may, in a proper case, guide estimation of profits of a subsequent year.
Merely because figures of profit available from certain statements found during search were different from profit shown in assessee's books of account the figure shown in such statement could not be treated as assessee's profits of the relevant year.
R.J. Trivedi (HUP) v. CIT (1983) 144 ITR 877 (UP).
Books cannot be rejected simply for lack of quantitative tally and taking into accounts irrelevant and non-existent facts and by omission to consider relevant facts.
44AD Note (Copy of Finance Bill, 1994).
Pithisaria 3rd Volume : Affidavit P. 4809.
Affidavit filed by assessee--He is neither cross-examined nor called upon to produce any documentary evidence, the assessee may assume that the IT authorities are satisfied with the affidavit as sufficient proof on the point in question.
It was, therefore, urged that the Tribunal may direct the AO to accept the book results or apply an appropriate rate, which on the facts and circumstances of the case the Hon'ble Tribunal may consider proper. The assessee has also filed a list of cases on the ground of allowance of interest when flat rate is applied. These are :
Tribunal Decisions:
Mohta Construction & Co. v. TTO 21 Tax World 257, ITAT (Jp), 11th Feb.;'1998;
Khartaram Choudhary v. TTO 21 Tax World 6, ITAT, Jaipur, 11th, Nov., 1997;
24 Tax World 442, TTO v. Gopalaram Premaram, ITAT Jodhpur, 25th Aug., 2000;
Dy. CIT v. Lhokha (sic):
High Court decision of Jain Construction Co. considered;
Jain Construction Co. v. ITO (ITA No. 707/Jp/1996) ITAT, Jaipur, 30th Aug., 1996;
Subhash Construction Co, v. ITO (ITA No. 644/Jp/1997) ITAT, Jaipur, 12th Oct., 1998;
Sri Ban & Co. v. Asstt. OT (ITA No. 522/Jp/1997) ITAT, Jaipur, 21st Sept., 1998;
Arjun Kishore Contractor v. Asstt. CIT (ITA Nos. 259/Jp/1996 & 38/Jp/1998) ITAT, Jaipur, 21st June, 1999 ;
D.S. Construction Co. v. ITO (ITA No. 646/Jp/1997) ITAT, Jaipur, 26th July, 1999;
Shree Pareek Contractors v. ITO (ITA No. 377/Jp/1998) ITAT, Jaipur, 20th Sept., 1999;
ITO v. MM. Goyal, (ITA No. 1394/Jp/1997) ITAT, Jaipur, 26th May, 2000;
Chandi Ram v. ITO (ITA No. 210/Jp/1998) ITAT, Jaipur, 9th Oct., 1998;
Shri Krishna Builders v. ITO (ITA No. 963/Jp/1996) ITAT, Jaipur, 24th June, 1998; and 22 Tax World 399 Judicial Discipline.
High Court Decisions:
The Tribunal was justified in allowing depreciation even if the ITO had categorically held that the income was estimated after allowing admissible depreciation.
CIT v. Bishambhar Dayal & Co. (1994) 210 ITR 118 (All); and CIT v. Jain Construction Co. and Ors. (supra).
5. On the other hand, the learned Departmental Representative contends that incriminating documents pertaining to 8-10 years were seized. Allegations are proved. Assessee was earning high profits but (sic) was disclosed.
The modus operandi was that the assessee was inflating expenses in the form of cash payment, etc. Directors have channelised the money back in the share capital in the promoter's quota. A reference was drawn to an instrument at paper book p. 98 filed by the Department which is a letter contending that the assessee has agreed to the application of rate of 11 per cent. This fact has been borne out in the assessment order in para 8 as under:
"That the proposal of the Department to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresses of sub-contractors, etc. and also unable to produce all witnesses. The assessee further stated that the allowability of depreciation and the interest on borrowed funds being an inseparable liability fastened with the conducting of the activity deserves to be allowed."
It is only after the assessee has given this letter, a most judicious and reasonable rate of 11 per cent was applied. Here, the Tribunal observed that no specific mention was there in the assessment order that assessment has been framed on agreed basis. The learned Departmental Representative contended that the rate of 11 per cent was applied on the basis of instrument dt. 9th Sept., 1998, and no detailed discrepancies were given as the assessee had agreed to the assessment. The learned Departmental Representative further contends that the detailed questionnaire were given to the assessee for furnishing information and replies and all such opportunities as given to the appellant have been mentioned in the assessment order which were based on the observations of the auditors and that of the AO himself. The learned Departmental Representative admits that auditors have also done certain mistakes and that is why a net profit rate of 11 per cent was applied on the basis of Annexures B and C of the audit report at paper book pp. 37 to 67 of the Departmental paper book. Paper book pp. 6,7,9,10,11, 85, 87 to 96, etc. have given rise to the said estimation of 11 per cent. The loose papers seized from pp. 87 to 96 show that the profit rate is about 22 per cent before deducting head office expenses and this is indicative of higher profit earnings made by the assessee. Shri A.K. Solanki, director, has also admitted of profit rate over 11.64 per cent. It was thus contended that there was no dispute by the assessee on 11 per cent after filing the instrument dt. 9th Sept., 1998, except on interest. The learned Departmental Representative also derives support from the order of the first appellate authority. Reliance has been placed on the decision of S.S. Ratanchand Bholanath v. CIT (1994) 210 ITR 682 (MP). Amidst the dictation, we have also received besides the written submission running into 6 pages and paper book filed by the Department running into 116 pages, two letters dt. 2nd Jan., 2001, and 3rd Jan., 2001, raising a plea that such a ground was not raised before the learned CIT(A) as per copies of grounds of appeal filed along with this letter, certain judgments have also been referred as under :
(i) Ugar Sugar Works Ltd. v. CIT (1983) 141 ITR 326, 335;
(ii) CIT v. Stepwell Industries (P) Ltd. (1997) 228 FTR 171 (SC);
(iii) U.K. Paints (India) Ltd. v. Dy. CIT (1997) 57 TTJ (Del) 537 : (1998) 66 ITD 450 (Del); and
(iv) Shri Ambica Mills (P) Ltd. v. CIT (1992) 198 ITR 99 (Guj).
In his letters furnished after the close of the hearing, the learned Departmental Representative submitted as under:
"That the assessment in this case was made on agreed basis keeping in view several documents seized, lengthy investigation carried out and the findings of the special audit got done under Section 142(2A) of the Act. This option of agreed assessment was chosen by the assessee not under pressure but voluntarily with the intention to avoid further investigation.
That all the exercise done at the time of assessment proceedings, were brought to the notice of the then CIT, Jaipur, several times and as a result of discussion held with the then CIT, Jaipur, the assessee agreed to be assessed at 11 per cent net profit on the declared contract receipts.
That depreciation was allowed to the assessee out of the net profit. However, interest was not allowed being normal business expenditure. However, the learned authorised representative of the assessee kept his right reserved regarding appeal before higher authorities only on limited point of interest. This fact is clear from the written submission of the assessee vide his letter dt. 9th Sept., 1998.
That not only this but the assessee also agreed before the then CIT, Jaipur, that it will acceed to 11 per cent NP in respect of asst. yrs. 1993-94 and 1994-95 before C!T(A), Jaipur, where assessments were made at 7 per cent NP. Accordingly request for enhancement was made to CIT(A) Raj-I Jaipur, and notice for such enhancement for asst. yrs. 1993-94 and 1994-95 had already been issued to the assessee.
That the claim of deduction under Section 35D of the Act for the year under appeal was foregone and deemed to have merged with application of 11 per cent NP.
That during course of hearing on 1st Jan., 2001, I have already submitted orally that on the basis of seized material, addition of about Rs. 2 crores was proposed to be made, as per details given in Annexure 'A'. The additions made by applying NP rate at 11 per cent is 1,47,03,493 which was near to the proposed addition maintained in Annexure A. Keeping in view of hundreds of defects noticed in the books of accounts. Therefore, considering the totality of the defects noticed, keeping in view the voluminous seized material and investigation carried out, NP rate of 11 per cent was applied with prior written approval of the then CIT, Jaipur. While doing so benefit of telescoping and recycling was also allowed as per written directions of the then CIT, Jaipur.
Though all major and important features and points have been highlighted in assessment order wherever necessary, but since it was an agreed assessment, no detailed discussion on seized material was considered necessary in order and only brief mention of facts was made.
That since the impugned order is agreed assessment order, the right to sue against the application of NP at 11 per cent has been forfeited by the assessee, except its claim of interest (P&H) HC and S.S. Ratanchand Bholanath v. CIT (1994) 210 ITR 682 (MP).
In view of above submissions, it is prayed that application of NP rate at 11 per cent and other additions made may kindly be confirmed and the assessee's appeal deserves to be dismissed.
Alternatively :
It is prayed that since the assessee has betrayed from its promise and trying to breach the trust, the entire assessment may kindly be set aside to be made de novo to the file of the AO so that more speaking and detailed order can be passed keeping in view of various' incriminating and seized documents/material as discussed above. This request is mainly made with a view that assessment in this case was made just like agreed settlement/assessment after taking a very judicious view in the interest of Revenue with the directions of and in consultation with the CIT, Jaipur. If the above mischief of assessee is entertained by the Hon'ble Bench, then it will set a bad precedent. Hence, it is again requested that all additions may kindly be confirmed."
Annexure. 'A' appended to letter dt. 2nd Jan., 2001.
Rs.
Disallowance out of public issue 40 lacs illegal payments to Railways officials, assessee was confronted.
30 lacs Benami investment in public issue (promoters quota) statement were recorded, bank accounts were scrutinized and assessee was confronted 32 lacs Interest free advances to directors about 50 lacs Inflated payments adjusted on last day without supportings in the names of directors refer details at p. 5 of departmental paper book- Adjusted on last day 31st March, 1995.
38 lacs Prior period expenses debited to P&L A/c Annexure D of Audit report 3,80,305 Capital expenditure claimed as revenue Annexure F. Huge transaction of Annexure A,B and C were also considered while applying rate of audit report showing cash payments above 10,000 and cash payment without supportings were also under consideration.
63,259 Annexure A-2/p. 6 of paper book Payments to politicians Annexure AKK-l/p. 8 of paper book contribution fund with assessee regarding share application 1,20,000 Annexure AA-1/14 p. 9 of paper book observations of Rajiv Kumar, CA, that company needs bogus bills to reduce the profit of company.
Annexure AD-2/25 p. 10 of paper book Discrepancies in cash book, balance was 23 lacs even withdrawals were made balancing with lead pencil showing opening and closing.
Annexure AD-2/94 p. 11 of paper book Bogus payments shown in the names of contractors Nathi, Rajkumar about 11 lacs.
Annexure A-l/3-Diary of Liaison Officer 4 lacs not entered.
Annexure AD-3/41-p. 13 of paper book Udipi Office 22 per cent NP works out as per this paper.
Annexure AD-4/18-11/61 NP is indicated.
Annexure S-3 Residence of Sandeep Bhargava indicates NP rate
11. 64 per cent.
Annexure A-25 page of paper book 16--2 lacs transactions not recorded in books of accounts. Amount advanced to director 50 lacs. Total about 2 crores.
Note : Majority of paper has been given in paper book. In case any other paper is needed same will be filed on the directors of Hon'ble ITAT Jaipur Bench, Jaipur."
6. On the issue of the interest, learned Departmental Representative contends that interest is not a charge to net profit and is already covered by the net profit rate of 11 per cent approved by the AO . The learned CIT(A) has also (sic) the decision by observing the judgment of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions (supra), wherein it was held that when the income is estimated under Section 145 of the IT Act, it is in substitution of the (sic).
are referred to in s, 29 are deemed to have been taken into account while making such an estimate. The reliance on Punjab & Haryana High Court and also that of the Hon'ble Rajasthan High Court reported at 245 ITR 527 (supra) quoted by the learned authorised representative is on different facts. It was, therefore, urged that the ground raised by the assessee on account of application of net profit rate as well as the deduction of interest needs to be rejected.
7. On the other hand, the learned counsel contends that it is evident from the assessment order at p. 3 that the audit was carried out by the auditors of the assessee on the basis of photostat copies and there is no mistake in making such a qualification in the report by the auditors. The observation of the learned Departmental Representative are not correct in respect of various allegations as referred in the Departmental paper book. In fact the AO himself has not given any finding with respect to certain names found mentioned in the loose papers. The cannot be said to be politicians at this stage. No inference can be drawn against the assessee. Extortious payment as noticed through the special audit report were not confronted to the assessee. The allegation of channelisation is also wrong as the issue of the appellant was subscribed more than 3 times. As such, the allegation of multiple application is also without any basis. Reference was also made to page Nos. 139, 144 and 150 from which it is revealed that disclosure made under VDIS 1997, filed by the subscribers stand duly accepted by the Department. With respect to all the expenses and the queries raised by the AO detailed replies were furnished, evidence of which was available in the seized record. The AO could not lay hand on any transaction which could be said to be not explained to his satisfaction and thus the assessment so framed by the AO by applying a net profit rate of 11 per cent and also not allowing the interest thereon is without any basis and highly unjustified.
8. Rival submissions have been heard with reference to material available on record and case laws referred by both the parties. Before we proceed further we consider it necessary to dispose of the plea raised by the Revenue with respect to the ground of application of net profit rate of 11 per cent contending that the same being additional ground deserves not to be entertained. After careful consideration of the letter dt. 3rd Jan., 2001, filed by the Revenue and careful consideration of material available on record we are of the view that it" is too late in the day to make such a plea by the Revenue, more particularly when the hearing of the case had already been closed on 1st Jan., 2001. As such, the request of the learned Departmental Representative deserves to be rejected on this count alone. However, we have also perused the impugned order and find that the learned CIT(A) has adjudicated the issue at para 3 of his order with the headnote as ground Nos. 1 to 3. Application of net rate of 11 per cent and disallowance of interest of Rs. 38,06,090. We find that such a ground does arise from the order of learned CIT(A) and accordingly the plea raised by the Revenue through its letter dt. .3rd Jan., 2001, is hereby rejected.
9. As regards the ground of application of net profit rate, it is observed that an action under Section 132(1) in this case was taken with an allegation that the assessee earned good profit but to suppress profit, the assessee-company has been indulging in inflating its expenses and making extortious payment. It has also channelised the unaccounted money by using multiple applications and Benami investment in the public issue of the company and cash transactions have been made by violating the provisions of Section 40A(3). The AO finding the complexity in the accounts of the assessee and also that the tax auditors have qualified in their report as to the audit of accounts carried out by them from photostat copies of primary books only and there was non-availability of vouchers as they are lying seized with the Department, decided to get a special audit done under s 142(2A) of the IT Act, 1961.
10. A number, of discrepancies and defects as reported by the special auditors or as observed by the AO were pointed out to the assessee through various questionnaries and the assessee was required to explain as to why the additions should not be made on the basis of such discrepancies.
11. The assessee vide its letter dt. 7th Aug., 1998, pointed out that the report of the auditors is itself full of deficiencies and that the report is not a correct version of the facts of the case. It was also pointed out that the auditors have exceeded their statutory authority while making observations on the system of accounting and vouching.
12. The AO with this background decided to verify each and every transaction as reported in the audit report annexures and observed that the assessee could justify few transactions and regarding remaining the reply filed was not satisfactory. The inspection of document was given to the appellant for giving satisfactory reply vis-a-vis record seized. This is how the AO noticed that there were certain annexures which were not covered by the special audit report. From such a finding of the AO itself and the admission of learned Departmental Representative that auditors have done, certain mistakes, it can be inferred that the allegation of the appellant about audit report is well-founded and thus we are of the view that the report of the auditors was not a conclusive report but merely an eye wash. No credence could, therefore, be given to such a report which is not based on the correct and complete appraisal of the facts of the case where more particularly, documents found and seized by making a serious invasion on the rights of the appellant were available with the Department but were not verified by the auditors for furnishing the report of the special audit under Section 142(2A) of the Act thereby defeating the very purpose and intent for which the assignment was entrusted to them. Since the learned Departmental Representative also admits of certain mistakes committed by the auditors, he himself resorted to the drill and issued fresh questionnaire to the appellant. The appellant met out the queries, though the explanation offered by the assessee was found not satisfactory for only a few of the transactions. These were not specified by the AO in his order. The AO required the assessee to show cause as to why the results declared by the assessee on the basis of books of account be not rejected and net profit from the contract receipts should not be estimated at a rate exceeding 11 per cent. In his explanation the assessee pointed out that the accounts maintained by the assessee-company are based on the accounting policies consistently adhered to by the company which are duly disclosed in the published annual financial result.
13. The AO observed that the books of account kept by the assessee were not maintained in the regular course of business as the assessee has suppressed its profits on various accounts and as the auditors have pointed out various defects narrated in the order. He was of the view that the correct income of the assessee cannot be deduced from the books of accounts maintained by the assessee and found it a fit case for applying the provisions of Section 145(2) of the IT Act. This has been done by the AO without bringing on record as to what are those remaining transactions which the assessee has not been able to explain to his satisfaction, nor did he prove or quantify the suppression or inflation as alleged by the auditors in their report or observed by the AO himself as also that no basis were given to hold that books have not been maintained in regular course. Still the AO chose to reject the accounts and applied a net profit rate of 11 per cent. It appears that accounts have been rejected because he found the assessee in a fix and not for other reasons.
14. The learned Departmental Representative before us narrated the various suppressions and inflations and also filed the same through Annexure 'A' of his letter dt. 2nd Jan., 2001, and contended that he had confronted the assessee with all such transactions, though the same are not conclusively brought on record before finally applying the net profit rate as the assessee had agreed to the application of net profit rate of 11 per cent and the assessment has been completed accordingly. The learned Departmental Representative has thus raised a serious dispute with regard to the application of net profit rate on agreed basis. In order to resolve this controversy, we have referred to the instrument dt. 9th Sept.; 1998, which is consequent to the proposal made by the AO for applying a net profit rate of more than 11 per cent vide his letter dt. 31st Aug., 1998. We find that the said proposal of the AO was never accepted by the assessee. The appellant appears to have made a counter proposal through the said instrument dt. 9th Sept., 1998, which reads as under :
"It is, however, submitted at this stage to avoid any confrontation with the Department and to purchase peace (though without admitting any deliberate errors). We submit that your proposal to apply profit rate exceeding 11 per cent is very high and if the profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresses, of sub-contractors (sic) and produce the personnel required for personnel examinations, etc."
In the later part of the same instrument the assessee has also laid down a condition as under :
"The allowability of depreciation and the interest on borrowed funds being an inseparable liability fastened with the conducting of the activity deserves to be allowed."
The said proposal finds a crystal clear mention at para 8 of the order of the AO also and there is no controversy with respect to the conditional proposal. As found out earlier, the offer of the AO was not accepted by the assessee and the appellant elected to make a counter-offer through the instrument dt. 9th Sept., 1998, relevant extract referred herein before, it is evident therefrom that such an offer was made by him for several reasons including inter alia, to purchase peace (though without admitting any deliberate errors) and also because the assessee was unable to collect information like addresses of some of the subcontractors and produce them for personal examination at the relevant time. The said counter-offer of the assessee was a conditional offer as to the allowability of depreciation and the interest on borrowed funds being an inseparable liability fastened with the conduct of the activity, but the AO neither informed the appellant that the proposal made is acceptable nor did he act in accordance with the offer so made by the appellant. It appears that of his own volition and unilaterly, the AO had chosen to assess at the rate of 11 per cent by allowing depreciation alone and not the interest which was a condition precedent to the proposal of the appellant and contending it as agreed by the appellant. As a matter of rule, the AO could not have accepted and rejected the same instrument. The existence of a choice between two rights was necessary so as to term it as an agreed assessment. It was thus necessary for him to adopt the contents of the instrument as a whole since a person cannot approbate and reprobate the same transaction. Having not accepted the instrument partly, the condition of agreement stand not applied. Nowhere the material on record also suggests of existence or availability of any acceptance or agreement by the appellant. We also find that the assessee did not communicate to the AO that he is giving up his statutory remedies to challenge the assessment order. The appellant neither acknowledged the liability nor did he make any assertion that the books of account do not disclose the correct income and that is how the appellant aggrieved with the action of the AO preferred an appeal before the CIT(A). The counter-offer of the appellant, therefore, could not be termed as an agreement within the true spirit of well known doctrine of election as it was necessary for the AO to conform to all the provisions and conditions of the instrument of offer made by the appellant so as to term it as an agreed assessment or application of rate of profit on agreed basis. Since it remained inconsistent to the offer made by the appellant, we hold that the assessment cannot be termed as an agreed assessment nor that the rate of 11 per cent applied by the AO was on agreed basis. The AO as well as the learned CIT(A) have thus committed a grave error in holding that application of rate of 11 per cent has been agreed by the assessee. Moreso the appellant appears to have given the counter-offer merely because the AO put him in a fix so as to make him to elect a course of acceptance of offer made by him. The learned CIT(A), therefore, has observed that assessee agreed to the proposal when he was cornered. Such an act is also opposed to law: It is well known that the phrase "approbate" and "reprobate" is borrowed from Scotts Law where it is used to express the principle embodied in the English doctrine of election, namely, that no party can accept and reject the same instrument [per Scrolton, L.J. in Verschures v. H.N. Steam Co. (1921) 2 KB 608\. The apex Court in Bhau Ram v. Baijnath AIR 1961 SC 1327, 1330 has also held that the existence of choice between two rights is also one of the conditions necessary for the applicability of the doctrine of approbate and reprobate. In Beepathuma v. Velasari AIR 1965 SC 241, Supreme Court at para 18 have in clear terms expressed that Indian Courts have applied the doctrine in several cases and a reference to all of them is hardly necessary. In 65 MLW 496, the scope of the doctrine of election is stated to be applicable in every species of instrument, whether deed or will. It also applied to both movables and immovables but the doctrine of election, however, cannot be resorted to in order to cause an illegality. A remedy to appeal against the order of assessment has been provided under the IT Act and thus the appellant had a statutory right to appeal. It is also well settled that there is no estoppel against a statute. It is thus now a trite law that the principle of estoppel has no application when statutory rights and liabilities are involved. It cannot impede right of appeal. No Court can scuttle or foreclose a statutory remedy of appeal or revision. Accordingly, we are of the clear view that neither the assessment could be said as an agreed assessment nor that the appellant agreed to application of 11 per cent of profit rate nor also the appellant could be stopped from resorting to the remedy of appeal. We, accordingly hold that the appellant had correctly invoked the jurisdiction for seeking relief before us and allow raising of such a plea by him.
15. After having held that this is not an assessment where the assessee has agreed to application of 11 per cent rate, we, therefore, proceed to find out the justification in applying the said rate of 11 per cent by the AO. The learned Departmental Representative before us has contended that the main Annexures are Annexures B and C of the audit report, which have led to the application of the said profit rate, We have perused para 7 of the assessment order and find that the AO has also made a mention that Annexures B and C are the main Annexures having major impact on the calculation of the correct profit of the company. We find that the AO himself has analysed each and every transaction with reference to the reply furnished by the assessee and he was of the firm opinion that the assessee could justify few transactions of these Annexures. The AO, however, did not bring any material with respect to any of such remaining transactions with which he was not satisfied though admittedly the reply thereto was duly furnished by the assessee. Merely because some of the sub-contractors could not be produced at the relevant time cannot lead to the conclusion of application of exorbitant rate of 11 per cent that too without giving a finding that the expenditure so claimed was not for business necessity or that it did not relate wholly and exclusively for the purpose of business as required under Section 37 of the IT Act. In fact, the AO did ask through various queries to give explanation but he has not stated basis of its estimate nor gave chance to the assessee to rebut the basis of arriving at the application of the precision rate of 11 per cent. The learned Departmental Representative filed Annexure A to his letter dt. 2nd Jan., 2001, in supplement to the arguments advanced by him. This Annexure contains various queries raised by the AO during the course of assessment proceedings on which our finding are contained hereinafter.
16. The query as regards to expenses on public issue, we find that a sum of Rs. 41.53 lacs stands debited to P&L a/c as per Schedule 12 of the balance sheet as reflected from paper book pp. 216 and 217 filed by the appellant. This amount is stated to be debited as per the accepted account policy of the company. The AO however, has not pointed out as to how much of the said expenditure does not pertain wholly and exclusively for the purpose of carrying of the business by the appellant, more particularly when we find that an amount of Rs. 8,20,091 is also included in the said expenditure pertaining to the postal charges paid by the company and which are prima facie allowable for earning of interest income of Rs. 46.16 lacs by the assessee-company as disclosed under the head "Other sources". However, we are not inclined to give our conclusive findings here as the issue of Rs. 8,20,091 is being agitated by the assessee under a separate ground. The claim of the assessee under Section 35D does not appear to have been quantified and allowed on this basis by the AO himself if he considered that whole or part of the said amount pertains to the public issue incurred by the assessee. Having not done so, it stands to reason that the whole amount thereof cannot be made as a basis for including the same in application of the profit rate as made by the AO.
17. Similarly, the learned Departmental Representative has drawn a reference to the illegal payment to railway officials, etc. We find that such payments, he himself has held to be extortious payment. Nowhere the AO has given any finding that the assessee made these payments wilfully or illegally. The extortious payments are nothing but payments made for business compulsions and the same being a business necessity cannot be said to be not deductible.
18. The issue of Benami investment in public issue stands duly replied by the assessee-company at paper book pp. 168, 169 and 170. It was contended that 3 persons, namely, S/Shri B.P. Sharma, NX Bhardwaj and H.P: Sharma made declarations before the learned CIT under VDIS 1997 regarding investment in the shares of the assessee-company in promoter's quota and the said disclosure had been accepted by the learned CIT as per copy of certificate placed at paper book pp. 139, 144 and 150. Since such disclosure has acquired finality, the same, therefore, cannot be held to be Benami investment as contended by the learned Departmental Representative without proving the same otherwise. The allegation of the AO that money adjusted in the account of the directors at the year end was used for investment in the promoter's quota of shares is without any basis and not tenable as the dates on which such advances appear to have been made with respect to some of the amounts relate to the period when the public issue which came on 14th June had already come to close on 18th June, 1994. It is not the case of the AO that the amounts so withdrawn have not been debited in the accounts of the company nor that there is no expenditure incurred by the directors for the business purposes of the appellant. In such circumstances the allegation appears to be unfounded and without any basis.
19. The interest-free advances stated to be given to directors stand duly replied by the appellant as per paper book p., 132. The record reveals that such advances are not Rs. 50 lacs but only Rs. 36.7 lacs. The circumstances under which the advances have been made have also been detailed, which inter alia, included the payments as required for meeting out the contingencies of the business since the work of the appellant is spread over to 19 sites. The said payments are duly accounted for and the account thereof has been rendered by the directors before the close of the annual account and expenditure incurred on that account has also been duly recorded in the books of account. The AO has not proved the inflation of expenses and, therefore, there is no material which could lead to application of higher rate of profit on this account. The learned Departmental Representative has also mentioned about inflated payments of Rs. 38 lacs. We have verified this allegation with reference to the reply furnished by the assessee at pp. 127 and 128. As referred in the preceding paragraph, such withdrawals are being made by the directors for meeting out business contingencies and necessities at different sites of the appellant-company as its works are spread over even to very small places where adequate facilities of each and every material or supplies thereto are not available. Besides this, the AO having neither proved the inflation nor brought on record even a single transaction to show the suppression of profits, it cannot be said that the amounts so withdrawn by the directors and adjusted at the end of the year are inflated payments. In fact, in the accounting parlance and business circles the purpose of making imprest advance is to meet liability of the business on day-to-day basis for the convenient handling and accounting and to avoid day-to-day repeated withdrawals. Before the annual accounts are closed, an account of the imprest advance is taken from the person to whom it is so made. The appellant has resorted to the same practice which is prevalent in the business circles and nothing new has been done by him. The AO might not be aware of such a practice, and his ignorance could have aroused genuine suspicion. But it is settled law that suspicion howsoever strong cannot take the place of proof. No adverse inference thus could have been drawn by the AO.
20. The prior period expenses as pointed out by the AO also have been answered by the assessee at paper book pp. 123 to 125 and prepaid expenses at pp. 129 and 130 and also at p. 136. The assessee has also contended that it maintains a hybrid system of accounting with respect to such payments which was not opposed by the learned Departmental Representative during the course of hearing before us. The amount on such prior period expenses are only to the extent of Rs. 3.80 lacs. Since the amount so spent are not in deviation to the system of accounting applied by the assessee, there was no occasion for the AO to come to any different conclusion.
21. The capital expenditure of Rs. 63,259 is nothing but the payments made for expenditure on items of the assets purchased having a cost below Rs. 5,000 and under the provisions of the IT Act, the same are fully deductible.
22. With respect to Annexures A, B and C the AO has made only general observation. The assessee has also furnished reply to pp. 112 to 114 and each and every transaction appears to have been answered in detail. The AO has recorded his own satisfaction with reference to most of the transactions. This gives rise to satisfaction of the circumstances under which such payments have been made. However, the AO himself has not brought on record as to what are such balance payments, if any, about which he was not satisfied. The same also could not be taken as a basis to adopt an exorbitant rate of 11 per cent.
23. The learned Departmental Representative has also made a reference to the payments made to the politicians for Rs. 5,20,000 but such an allegation is without any substance and without bringing any material on record and is therefore, unfounded.
24. Annexure AA/9 referred to by the AO has not been put-forth before the Tribunal. However, another Annexure AD-9 relates to the similar allegation as dealt in before us in the above paragraph and needs no comments. The AO's Annexure AKK-1 also appears to have duly been answered by the assessee at paper book p. 66.
25. Various other annexures AD/25, AD 2/94, AD 1/3, AD 3/41, AD 4/18 and Annexure S-3 and A1/25 as referred by the learned Departmental Representative find that all such queries stand duly replied by the assessee at paper book pp. 42, 33, 55, 57, 58 and 59, respectively. We also find that the transactions in these annexures relate to certain debits made in the P&L a/c or payment allocations at sites proposed to be made or rough calculations or provisional figures of the results of the assessee-company Annexure (sic) the transaction out of that are not alleged to be incurred for the purpose of business. Another Annexure S-3, the AO has not brought any material on record as to whether any opportunity was afforded to the appellant and even whether he recorded any statement of such an employee and confronted the assessee with the same from whose house that paper was recovered. Having not done, it was not permissible to use the same against the appellant.
26. From para 3.3. of the order of the learned CIT(A), we also find that reliance has been placed on the statement of Mr. A.K. Solanki about net profit rate of 11.64 per cent. This has been done without bringing on record as to the circumstances under which such a statement has been made by the said person and as to what he meant by the net profit so informed nor the AO enquired into the correctness of veracity of such statement. Nothing has been brought on record as to how the said rate of 11.64 per cent has been stated by the said Shri A.K. Solanki and what were the basis of stating the rate of 11.64 per cent. What was his authority to make such a statement has also not been enquired. All these questions remain unanswered and as the AO himself did not strictly apply the rate so stated by him, no credence can be given to such a statement for applying rate of 11 per cent by the AO in the case of the appellant, more particularly when the same was not produced before the Tribunal also when asked to do so.
27. From the various replies furnished by the assessee and from the findings of the AO in the assessment order, it cannot conclusively be said as to what are the remaining payments which could be said not to have been incurred wholly and exclusively for purpose of carrying on of the business as the assessee has been able to substantiate its claim before the AO. We also find that nowhere in the assessment order the AO made is clear as to how he has arrived at the surgical precision rate of 11 per cent. Even if in the absence of any supporting vouchers the AO was justified in invoking provisions of Section 145 of the Act, though not challenged by the appellant before us, it did not mean that fie had got abundant power to make the additions or estimation at his sweet will. It is settled proposition of law that assessment is a quasi judicial proceedings in which the personal will or rough estimation did not have any place, The AO is bound to disclose the mental process through which he arrived at a particular figure of income as his orders are being subjected to appeal and, therefore, should have been speaking one. It is evidenced from the past history of the appellant that never a profit rate of more than 7 per cent was applied in the case of the appellant, more particularly when two of the past assessments have already been completed as a consequence of the search and incriminating documents as alleged in the year under appeal were also available with the AO in those assessments. Keeping in view the peculiar circumstances like nature of business, expenses on public issue, etc. in the year under appeal, the assessee's own history for the earlier years, overall fact findings and circumstances of the case, suppression of profits having not been established, allegations having1 not been proved, explanation rendered by the appellant and the legislative history, we find that there was no justification in applying or confirming net profit rate of 11 per cent which we hold that the ad hoc application of 8 per cent net profit rate subject to allowability of depreciation and interest thereon in the case of the assessee was justified in order to cover all the discrepancies, errors and allegations found through the transactions recorded in the books or the loose papers so found and seized from the premises of the appellant or its directors and accordingly direct the AO to recalculate the income of the appellant.
28. The AO has allowed the deduction of depreciation from the net profit rate. He denies the interest by relying on the decision of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions Co. v. CIT (supra). This view of the AO has also been confirmed by the learned CIT(A). But the assessee contends that the later part of the decision has not been properly applied which is favourable to the assessee. Besides this, it was contended that the jurisdictional High Court in the case of CIT v. Jain Construction Co. (supra) has decided the issue in favour of the assessee. The Jaipur Bench of the Tribunal has also been taking a consistent view and allowing interest to third parties on net profit applied in making the assessment. The learned Departmental Representative, however, tried to distinguish the decision of Hon'ble Rajasthan High Court on facts.
29. We have heard the rival submissions with reference to the precedents relied upon and material brought on record. The assessee has paid interest to third parties amounting to Rs. 38,06,090 for the purpose of business carried on by the appellant. Provisions of s, 145 has been invoked by the AO for estimating the net profit rate and the application of Section 145 has not been challenged by the assessee. However, after examining various queries raised by the AO and proper appreciation of material on record which has led to estimation of net profit rate, in the preceding paragraph we have already held that the application of 11 per cent net profit rate is exorbitantly" high and same is directed to be reduced to 8 per cent, subject to allowability of depreciation and interest. Since the AO has allowed the depreciation, the interest is also allowable to him as directed. We have called for the order of the. Jaipur. Bench of the Tribunal in the case of Dy. CIT v. Khokhar Construction Co. in ITA No. 334 to 336/Jp/1999 decided on 18th Jan., 2000 where one of us learned JM was party to the order. The operative portion of the said order reads as under:
"We have heard the rival parties and perused the material available on record. The issue before us is whether deductions on account of depreciation, interest paid to third parties and interest and salaries to the working partners is an allowable deduction from the net profit worked out on the basis of applying net profit rate or not. This Bench is consistently holding that if the total income is computed by applying net profit rate, deductions on account of depreciation, interest paid to third parties and interest and salary payable under Section 40(b) is an allowable deduction. This view has also been upheld by the Hon'ble Rajasthan High Court in the case of Jain Construction Co. (supra), and also CIT v. Heeralal Bhatt 22 Tax World 817."
In view of our findings and for the sake of consistency also of view taken by the Jaipur Bench of Tribunal, we hold that expenditure on interest amounting to Rs. 38,06,090 has been incurred by the appellant for the business purposes and is allowable to him. We accordingly direct the AO to allow the same from the net profit as directed in the earlier paragraph of this order. This disposes of the assessee's ground Nos. 1 to 2.5.
30. Ground Nos. 3 of the assessee is an alternative ground raised by the assessee, Since we have already held that amount of Rs. 38,06,090 on account of interest is an allowable deduction under the head "Income from business", this ground has thus become infructuous and is, therefore, dismissed.
31. Ground Nos. 4, 5, 6 & 7 relate to the addition of Rs. 13,34,308 arising from Annexure AD-28/10 siezed by the AO.
32. Rival submissions has been heard with reference to the case law relied on by both the parties. The AO has made this loose paper as annexure to the assessment order. This was found and seized during the course of the search. The said paper does not bear any of the dates nor does it refer to the working of any income or profitability by the assessee. The AO did not doubt the explanation of the assessee that the said loose paper relate to the sites of the appellant where contract works are being carried out. The AO has himself accepted the gross turnover from the contract receipts to pe correct. However, from the receipt of Rs. 44,82,405 the expenses of Rs. 31,48,097 have been (sic-deducted) and the balance of Rs. 13,34,308 has been striked. Further, the amount of Rs. 4,04,025 and Rs. 1,96,300 have also been reduced from the said figure of Rs. 13,34,308 with certain abbreviations contended to be similar to the name of the employees. In another corner, three different entries with the abbreviation similar to the name of the directors have been jotted and total of such figure is Rs. 7,11,236. The AO appears to have taken Rs. 13,34,308 as income arising from this loose paper. This has been done without establishing or bringing, on record any material to show that the receipt of Rs. 44,82,405 written on this paper are in the nature of income. We find that the assessee is acting as contractor only for Indian Railways and all the payments have been received through cheque. The Revenue has not found any bank account to show that any amount received from the Indian Railways was not resorded in the books of account. As a matter of fact, all the contract "receipts" of the assessee have fully been recorded in the books of account for estimating the net profit rate. The said document is, therefore, a dumb document, which does not speak of any earnings made by the assessee. While deciding the issue of applicability of net profit rate, we have found that the directors, who have been taking advances from the company for incurring various expenses, on subsequent dates have been rendering accounts thereof From this loose paper, the possibility that the amount of Rs. 44,82,405 are the receipts by the directors and other employees as imprest money for the purpose of incurring expenses at 19 sites spread over at various places cannot be ruled out against which at the time of writing this slip the expenses appear to have been incurred to the extent of Rs. 31,48,097 and further payments of Rs. 4,04,025 and Rs. 1,96,300 have also been made, Out of the balance of Rs. 7,33,983, the imprest that could be said to be available with the three directors of the company is Rs. 7,11,236 as under :
Rs.
RDS 3,24,050 SDS 2,28,187 NLK 1,58,999 7,11,236
33. The learned Departmental Representative has not been in a position to bring any material on record to show that any of the said amount represented income in the hands of the appellant-company before holding the amount of Rs. 13,34,308 as profit through the said loose paper. The possibility of imprest amount with the directors as referred hereinabove cannot be ruled out. Even otherwise, any profit rate from the loose paper found and seized during the course of search from the contract receipts stand duly covered in the net profit rate estimated and as such no separate addition on this account was required. The same is, therefore, directed to be deleted.
34. Ground No. 8 raised by the assessee stands already dealt in the main ground of application of rate. No comments are, therefore, necessary. The same is accordingly treated as disposed of.
35. Ground No. 9 relates to the charging of interest under Section 234B. Both the parties have agreed that the issue is squarely covered by the decision of apex Court in the case of CIT v. Ranchi Club Ltd. and Ors. 24 Tax World 452 (SC).
36. After hearing the rival submissions and respectfully following the decision of Hon'ble Supreme Court of India in the case of CIT and Ors. v. Ranchi Club Ltd and Ors. in Civil Appeal No. 10360 of 1998 and 145 to 149 of 1997, we direct the AO to charge interest under Section 234B on the total income as declared in the return by the appellant and not on the income so determined by the AO.
37. Ground Nos. 10.1 and 10.2 relate to the additional grounds not admitted by the learned CIT(A) on account of amortisation of preliminary expenses and allowances of Rs. 8,20,091 from interest income of public issue.
38. The rival submissions have been heard with reference to case law relied upon by both the parties. The learned CIT(A) did not entertain the additional grounds merely because of agreed application of net profit rate of 11 per cent under a package offer to the Department and the appellant had not claimed such deduction before the AO. We have already held that the net profit rate of 11 per cent was not agreed and applied by the AO in computing the income of the appellant. We also find that the assessee through the P&L a/c has claimed the said expenditure deductible from the income which was not allowed to it by the AO. The assessee has given a reasonable explanation and also satisfied that the omission of the ground from the Form of Appeal before the learned CIT(A) was not wilful or unreasonable. We, therefore, direct the learned CIT(A) to admit both the grounds and decide the same after hearing the appellant. This issue is, therefore, restored back to the learned CIT(A).
39. Ground Nos. 11 and 12 being general and not. relevant to the disputes, are dismissed as not pressed.
40. In the result, appeal of the assessee is partly allowed.
Dinesh K. Agarwal, J.M. 26th My, 2001
1. I have carefully gone through the draft order but I have not been able to persuade myself to concur with the views taken in para 27 while applying ad hoc application of 8 per cent net profit rate, subject to allowability of depreciation and interest thereon as against 11 per cent confirmed by the CIT(A) I wish to record my respectful dissent with regard to the said findings on the following grounds :
2. In this case, it was found by the AO that due to the nature and complicity of the accounts and in the interest of Revenue to get the accounts audited by a chartered accountant nominated by the CIT, therefore, the AO. in view of Section 142(2A), referred the case for the special audit. The nominated chartered accountant has given his report on the basis of photostat copy of the primary books of accounts and without examining the various documents and vouchers which were lying with the Department. The books of accounts, vouchers and other material were not provided to the nominated chartered accountant and his report has not been considered by the AO while making the assessment, therefore, it is a clear violation of the principle of law and keeping in view the judgment of Hon'ble Allahabad High Court in the case of Swadeshi Cotton Mills Ltd. v. CIT (198$) 171 ITR 634 (All) wherein it was held that : "There should be an honest attempt to understand the accounts of the assessee." Since in the case before us, it appears that the complete and proper material for auditing the books of accounts was not provided to the special audit, therefore, it is a complete disregard of the provisions of the Section 142(2A). However, instead of sending the matter back to file of the AO I am of the view that since both parties have agreed to apply 11 per cent net profit rate, therefore, in view of my discussion in the later part of my order, the assessment completed by applying net profit at 11 per cent is upheld.
3. I further do not agreed with the view of learned AM who has held in line 17 of page No. 19 that "we hold that the assessment cannot be termed as an agreed assessment nor that the rate of 11 per cent applied by the AO was on agreed basis. The AO as well as the learned CIT(A) have thus committed a grave error in holding that application of rate of 11 per cent has been agreed by the assessee."
4. I also do not agree with the conclusion arrived at page No. 20 para 14, which reads as under :
"We, accordingly hold that the appellant had correctly invoked the jurisdiction for seeking relief before us and allow raising of such a plea by him,"
5. On the contrary, I find that on the basis of the appellant's letter dt. 9th Sept., 1998, which has been referred in the earlier part of the order in para 14 at page No. 17, the appellant has imposed the condition in the first para of the letter by saying that, "We submit that your proposal to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresses of sub-contractors (sic) and produce the personnel for personal examinations etc."
6. This part of the letter itself is a conditional part which has been duly accepted by the AO and the AO, without going into the further examination of the voluminous papers, accounts and documents has considered it fair and reasonable to accept the assessee's offer and, accordingly, applied net profit rate at 11 per cent on the contract receipts, therefore, the assessment made by the AO is an agreed assessment, which is a valid assessment in the eye of law in view of following cases of Hon'ble Supreme Court of India :
1. Nathoo Lal v. Durga Prasad AIR 1954 SC 355, 358;
2. Banarsi Das v. Kanshi Ram AIR 1963 SC 1165, 1169;
3. Narayan Bhagwantrao Gosavi Balajiwale v. Gopal Vinayak Gosavi AIR 1960 SC 100, 105;
4. Ramji Dayawala & Sons (P) Ltd. v. Invest Import AIR 1981 SC 2085, 2093; and
5. Thiru John v. Returning Officer AIR 1977 SC 1724, 1726-7.
7. In the later part of the same letter of the assessee, which has also been mentioned in the order at page No. 18, I find that it is not a conditional part of first para of the letter of offer but, on the other hand, the assessee is requesting to allow depreciation and interest on the borrowed funds being an inseparable liability fastened with the conducting of the activity. In my opinion, it is a separate and independent request of the assessee, which cannot be said that if the later request is not accepted, then the request made in the first para of the letter automatically goes off. As a matter of fact, I find that the AO has also accepted the assessee's request for allowing depreciation but the interest was not allowed by the AO, following the decision of Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions v. CIT (1998) 232 ITR 776.
8. Since the assessment was made on the clear admission Dy the assessee vide his letter dt. 9th Sept., 1998, and in view of the (sic) of Mr. A.K. Solanki, in which (sic) higher net profit rate at 11.64 per cent was admitted and in the absence of any contrary material brought on record to show that the confession made by the assessee is not voluntary or under duress, I, therefore, keeping in view of the judgment of Hon'ble Supreme Court of India in the case of Surjeet Singh Chhabra v. Union of India and Ors. (1996) 135 Taxation 711 hold that the net profit rate applied by the AO is quite justified and hence the order passed by the CIT(A) on this account is upheld.
9. Except, the issue of net profit rate at 11 per cent, I agree with the findings recorded by the learned AM in respect of other issues in this appeal.
REFERENCE UNDER Section 255(4) OF THE IT ACT 1961 Dinesh K. Agarwal, J.M. 26th My, 2001
1. As there is a difference of opinion between the Members in one issue of present appeal, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, ITAT in terms of Section 255(4) of the IT Act. Accordingly, the following question of difference is referred ;
"Whether on the facts and in the circumstances of the case, in view of various defects pointed out by the AO, the agreed assessment order made by applying 11 per cent net rate of profit it valid considering the various decisions of the Hon'ble Supreme Court of India and whether in the absence of any contrary material brought on record to show that the confession made by the assessee is valid in view of the judgment of the apex Court in the case of Surjeet Singh Chhabra v. Union of India and Ors. (1996) 135 Taxation 711."
2. We direct the registry to place the matter before the Hon'ble President, ITAT, B.R. Jain, A.M. 26th July, 2001
1. Following questions of difference are also referred in terms of Section 255(4) of the IT Act, 1961, for resolving the difference of opinion.
"1. Whether, on the facts and findings, it could be said that the assessee had unconditionally agreed to application of 11 per cent net profit rate and such a rate was not subject to allowance of depreciation and interest.
2. Whether, on the facts and findings and in law, the assessment cannot be termed as an agreed assessment and that the assessee's counter-offer which was conditional to the effect that depreciation and interest on borrowed funds being an inseparable liability fastened with the conducting of the activity was a part of the same instrument dt. 9th Sept., 1998, which was a condition required to be accepted by the AO so as to term it as. an agreed assessment before application of any profit rate or that it was merely a request at the discretion of the AO.
3. Whether the AO has made the assessment on the clear admission by the assessee and that the assessee made a voluntary confession in his letter dt. 9th Sept., 1998, and not that when the AO put him in a fix and the assessee did so only when he was cornered,
4. Whether, the action of the AO could be said to have caused any illegality so as to prejudice the rights of the appellant or that the AO "has merely erred in accepting and rejecting the same instrument of dt. 9th Sept., 1998.
5. Whether, on facts and findings, there was an estoppel in law on the assessee to appeal against the order so made.
6. Whether, there was material on record for learned JM not agreeing to the two findings recorded by the learned AM as referred in his order and also that the AO did not examine voluminous papers, accounts and documents before applying a net profit rate of 11 per cent.
7. Whether, on the facts and in law, the assesses could have invoked the jurisdiction of the Tribunal and claim relief against the assessment so made and rate applied by the AO.
8. Whether, on facts, findings and in law the AM was right in applying a profit rate of 8 per cent or that there was sufficient material and basis to uphold the application of rate of 11 per cent which the Tribunal could not have disturbed and was beyond its competence.
V. Dongzathang, President (As A Third Member) 22nd May, 2002
1. The Jaipur Bench of the Tribunal made a reference under Section 255(4) of the Act in which the following question was referred by the JM :
"Whether, on the facts and in the circumstances of the case, in view of various defects pointed out by the AO, the agreed assessment order made by applying 11 per cent net rate of profit is valid considering the various decisions of the Hon'ble Supreme Court of India and whether in the absence of any contrary material brought on record to show that the confession made by the assessee is valid in view of the judgment of the apex Court in the case of Surjeet Singh Chhabra v. Union of India and Ors. (1996) 135 Taxation 711."
The AM, however, proposed 8 questions as follows ;
"1. Whether, on the facts and findings, it could be said that the assessee had unconditionally agreed to application of 11 per cent net profit rate and such a rate was not subject to allowance of depreciation and interest.
2. Whether, on the facts and findings and in law, the assessment cannot be termed as an agreed assessment and that the assessee's counter-offer which was conditional to the effect that depreciation and interest on borrowed funds being an inseparable liability fastened with the conducting of the activity was a part of the same instrument dt. 9th Sept., 1998, which was a condition required to be accepted by the AO so as to term it as an agreed assessment before application of any profit rate or that it was merely a request at the discretion of the AO.
3. Whether, the AO has made the assessment on the clear admission by the assessee and that the assessee made a voluntary confession in his letter dt. 9th Sept., 1998, and not that when the AO put him in a fix and the assessee did so only when he was cornered.
4. Whether, the action of the AO could be said to have caused any illegality so as to prejudice the rights of the appellant or that the AO has merely erred in accepting and rejecting the same instrument of dt. 9th Sept., 1998.
5. Whether, on facts and findings, there was an estoppel in law on the assessee to appeal against the order so made,
6. Whether, there was material on record for learned JM not agreeing to the two findings recorded by the learned AM as referred in his order and also that the AO did not examine voluminous papers, accounts and documents before applying a net profit rate of 11 per cent.
7. Whether, on the facts and in law, the assessee could have invoked the jurisdiction of the Tribunal and claim relief against the assessment so made and rate applied by the AO.
8. Whether, on facts, findings and in law the AM was right in applying a profit rate of 8 per cent or that there was sufficient material and basis to uphold the application of rate of 11 per cent which the Tribunal could not have disturbed and was beyond its competence."
Neither the question proposed by the JM was counter-signed by the AM nor the questions proposed by the AM were counter-signed by the JM. In such a case, if there is no unanimity on the question itself, there can be no majority decision even if all the questions referred by each of the Members are answered by the Third Member. Technically the reference made under Section 255(4) is defective and is liable to be returned to the Bench for making an agreed point or points of difference so that the Third Member can apply his mind,
2. From a cursory reading of the orders, it appears that the assessee in this case made a counter-proposal to the AO to the effect that the proposal to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresses of sub-contractors and produce the personnel for personal examination, etc. If the controversy is on this point then both the parties have to be heard as to whether such proposal put up by the assessee is binding on the assessee and then the Bench has to decide on the point. If the said proposal is not binding then a reasonable profit has to be determined on the basis of the material on record and the submissions by the parties. In case there is still difference of opinion on the income determined, then the point of difference has to be crystallised and referred to the Third Member for decision.
3. Since the Bench has not done proper exercise to come to a definite point of difference, the case is returned to the Bench for reconsideration and proper reference in accordance with law, if necessary. With these remarks, the case is' returned to the Bench for fresh consideration.
B.R. Jain, AM.
5th Sept., 2002
1. Consequent to reference under Section 255(4) of the IT Act, 1961, the Hon'ble President, Tribunal, nominated himself as the Third Member. The Third Member after hearing the parties returned the reference to the Bench. It was also observed that the assessee in this case made a counter-proposal to the AO to the effect that the proposal to apply profit rate exceeding 11 per cent is very high and a profit rate of 11 per cent is applied to the contract receipts, it will be acceptable, as the assessee is not in a position to collect information like addresses of sub-contractors and produce the personnel for personal examination, etc. The Third Member, therefore, concluded that if the controversy is on this point, then both the parties have to be heard as to whether such proposal put by the assessee is binding on the assessee and then the Bench has to decide on the point. If the said proposal is not binding then a reasonable profit has to be determined on the basis of the material on record and the submissions by the parties. In case there is still difference of opinion on the income determined, then the point of difference has to be crystallised and referred to the Third Member for decision.
2. In the light of the above, the parties were given a specific opportunity vide order-sheet entry dt. 31st July, 2002. The assessee's counsel Shri O.P. Agarwal emphasized that the assessment framed by the AO cannot be termed as an agreed assessment. The assessee never agreed to the application of net profit rate of 11 per cent. The AO proposed to apply a profit rate exceeding 11 per cent as per notice dt. 31st Aug., 1998, placed at APB pp. 48-50. To this the assessee gave a counter-offer as narrated by the AO in his order at internal pp.7-8 as under :
"Regarding profit estimation the assessee has replied on p. 1 point 1 of its reply dt. 9th Sept., 1998, that the proposal of the Department to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresses of sub-contractors, etc. and also unable to produce all witnesses. The assessee further stated that the allowability of depreciation and the interest on borrowed funds being an inseparable liability fastened with the conducting of the activity deserves to be allowed."
From the above it is evident that the AO himself has acknowledged the counter-offer and did not act according to the counter-offer given by the assessee. Contrary to this, the AO proceeded in applying a net profit rate of 11 per cent. In addition to this, he did not allow the deduction for interest payment of Rs. 38,06,090 and also further sustained an addition of Rs. 13,34,308 as income from business activities, not disclosed by the assessee. The above action of the AO in itself projects that the instant assessment cannot be validly regarded as an agreed assessment. It was, therefore, further vehemently contended by the learned counsel for the assessee that the learned CIT(A) recorded a finding that assessee's agreement for an agreed assessment cannot be ignored, since the agreement was made based upon the agreement to apply net profit rate of 11 per cent which was reached after the assessee was cornered by the Department after the search was conducted on it and on the basis of material found and seized. This finding of the learned CIT(A) was not a correct finding of fact but the offer made by appellant was conditional one as there has been no acceptance at all of the terms of offer made by AO and, therefore, the assessee cannot be held to be bound by such purported agreement. It was, therefore, submitted that the offer contained in the letter dt. 9th Sept., 1998, by the assessee is a mere alternate proposal and it cannot be said that it is a letter of admission whereby the assessee was agreed to be assessed on an income to be determined by application of profit rate of 11 per cent. The assessee's request can in no manner be treated as an admission by him. The assessee has been pleading before the AO that the profit reflected in the P&L a/c is based upon book of account which are audited accounts and that the profits reflected are true and correct income of the assessee which deserves to be accepted and the alternate plea made was without prejudice to the acceptance of income as per P&L a/c. At no stage the assessee can be said to have given up its right to appeal against such an assessment. The instrument dt. 9th Sept., 1998, itself reveals that the accounts maintained by the assessee are based upon accounting policies consistently adhered to by the company which are published in the public financial results and in this background, the letter dt. 9th Sept., 1998, was addressed to the AO. Thus, in itself the assessee has objected to the application of Section 145(2) of the IT Act, 1961, and even to the application of proviso below Section 145 while maintaining that the books of account maintained are correct and complete and the profit could alone be estimated based upon the books of account maintained by it, if there is no material on record to record a finding that the books of account are either incomplete or incorrect or method of accounting of the assessee is such on the basis of which true profit cannot be deducted. The assessee's alternate submission was merely to avoid any confrontation with the Department and to purchase peace, though without admitting any deliberate errors, the assessee submitted that the proposal to apply profit rate of 11 per cent will be acceptable which was a conditional offer. It is not a case where the assessee can be said to have unequivocally agreed that the income of the assessee be determined on agreed basis as was the case before their Lordships of the Hon'ble Allahabad High Court in the case of Sterling Machine Tools v. CIT (1980) 122 ITR 926 (All). The assessee's counsel further submits that the Hon'ble Supreme Court in the case of Prem Ex-Serviceman Co-op. Tenant Farming Society Ltd. v. State of Haryana AIR 1974 SC 1121 at p. 1122 has held that the effect of an alleged admission depends upon the circumstances in which it was made. In other words, the value of admission must depend upon the circumstances in which they are made and possible motives for incorrect statements by interested persons should not be ignored. Having regard to the aforesaid judgment and also having regard to the circumstances of the case, it cannot be concluded validly that there was an unequivocal admission made by the assessee of any nature. It is true that an admission made by an assessee constitutes a relevant piece of evidence but if the assessee contends that in making the admission, he has proceeded on a mistaken understanding or the true position, such admission cannot be relied upon without first considering the aforesaid contention. This is a view which has been taken by the Himachal Pradesh High Court in the case of Satinder Kumar v. CIT (1977) 106 ITR 64 (HP) at p. 72. In any event, even if it is assumed that the letter dt. 9th Sept., 1998, can be termed as an admission, the same has to be treated as having been given under a mistaken understanding in view of the fact that the assessee had alternatively contended that higher rate of profit cannot be applied and from that fact alone, it cannot be concluded that the assessee has agreed to be assessed at a net profit rate of 11 per cent. It, therefore, has to be seen whether the rate of 11 per cent is appropriate or otherwise more in the light of the fact and circumstance that when the assessee was throughout contending that the books of account maintained by it do not suffer from any infirmity and deserve acceptance of the declared book result. Besides explanation of the assessee on various seized material and documents having been furnished to the AO all the receipts of the assessee are from Indian Railways and credited through bank channels in its books of account. No part of these receipts are from any other source, other than the contracts from the Railway. Notings and jottings were found duly explained which were also stated to have been covered by the application of the profit rate in the counterproposal of the assessee. The AO's thus making a separate addition of Rs. 13,34,308 on account of notings and jottings in its books, goes to show that the offer was conditional and the AO himself has not given effect to the offer. As the AO himself did not accept the offer, the same cannot be regarded as an estoppel, which in law cannot be so regarded. The assessee was, therefore, entitled to appeal. It is thus submitted that the assessee has been able to establish that the offer was erroneous and as an alternative and conditional one, and in the light of the decision of Puttangode Rubber Produce Co. Ltd. v. State of Kerala (1973) 91 ITR 18 (SC), the counter-offer of the assessee cannot be treated as conclusive. It was further submitted that the learned AM in his order, which was dissented by the learned JM has already given a detailed reasoning and the assessee placed strong reliance on such reasons taken for arriving at the conclusion that the assessment so made cannot be termed as an agreed assessment and it was justified to apply a profit rate of 8 per cent subject to allowance of depreciation and interest, though the same are on higher side and are not admitted by the appellant. Reliance has also been placed on the decision of jurisdictional High Court in the case of CIT v. Jain Construction Co. and Ors. (2000) 245 ITR 527 (Raj).
3. On the other hand, the learned Departmental Representative referred to the statement of Shri Ashok Kumar Solanki, recorded at the time of search and the relevant reply given by him as contained in question No. 38 which reads as under :
Q. "What is the income of the company from the contract works usually ?
Ans. "According to my knowledge approximately 10 per cent to 15 per cent of the total receipts."
The assessee also agreed to 11 per cent and as such the assessment has to be treated as agreed assessment and application of profit rate of 11 per cent is justified.
4. In rejoinder the assessee's counsel Shri Agarwal stated that the statement given by Shri Solanki is not in reference to any particular contract awarded to the assessee nor any basis for stating an ad hoc figure of 10 per cent to 15 per cent of the receipt was given. Such a statement was a vague statement not based on any material and cannot be termed as a specific statement in respect of net profit earned by the assessee. The AO even did not make the basis of making such a statement or for arriving at the approximate income of 10 per cent to 15 per cent of the receipts. It was also not specified whether the above income was before allowing depreciation and interest or otherwise, nor any period to which such an income has been stated was narrated by the said Shri Solanki. The same cannot be said to be applicable to the year under appeal and no credence can be given to such a statement. Under the facts and circumstances of the case when the assessee's accounts were duly audited, it exhibited a true and fair income disclosed by it when the affidavit of the same director filed during assessment proceedings has not been found false or wrong by the AO.
4.1. Rival submissions have been heard with reference to material on record and case laws relied upon by the parties. An action under Section 132(1) of the IT Act, 1961, was taken on the appellant on 14th March, 1999 and books of account and various documents were found and seized. The appellant is engaged in the business of undertaking the works contract project of Indian Railways on turnkey basis, having specialization in installation of colour light signalling system at the railway stations. The appellant had also undertaken the activity of manufacture and sale of EPABX system at Jaipur and furnished the return of total income declaring an income of Rs. 88,91,700. The accounts maintained by the appellant were duly audited and were supported by report of auditors. The assessee disclosed a net profit rate of 3 per cent. The AO, however, decided to get the special audit done under Section 145(2) of the IT Act, 1961 The discrepancies and defects as pointed out by the special auditors M/s H.M. Singhvi & Co. CAs. in its report, which came after extension upto 22nd June, 1998, were duly replied and reconciled by the appellant through its letter dt. 7th Aug., 1998. It was also pointed out in that letter that the auditors have exceeded their statutory authority while making observations on the system of accounting and vouching. The aforesaid reply of the appellant to the audit report was duly examined by the AO himself and the matter was also discussed by the AO with the special auditors vide para 8 of the order of AO. The AO found that there were certain seized annexures containing loose papers, which were not covered by the special auditors' report. The learned Departmental Representative, present in the original proceedings before the Tribunal, has also agreed that the auditors have committed certain mistakes. From such findings and admission, the assessee's objection to the audit report and its credence have to be accepted and accordingly such a report cannot be termed a conclusive report for rejecting the accounts or applying a. higher profit rate than that was disclosed by the assessee. No credence, therefore, can be given to such a report which is not based on the correct appraisal of the facts and the material which were available with the AO himself and which were seized after carrying out the search on the assessee. Such a view is also borne out from the exercise undertaken by the AO, as he issued a separate questionnaire to the appellant which was so done without depending on or relying upon the finding of the special auditors. The AO is-found to have issued a show-cause notice to the assessee asking as to why the net profit from the contract business should not be estimated at a rate exceeding 11 per cent, The assessee replied to the show-cause notice vide its letter dt. 9th Sept., 1998, copy of which is placed at APB pp. 29-47. On this issue the assessee stated as under :
"It has already been explained in response to the query on application of provisions of Section 145 of the IT Act, 1961 vide letter dt. 3rd Aug., 1998, that the accounts maintained by the assessee-company are based on accounting policies consistently adhered to by the company which are duly disclosed in the published annual financial results.
It is, however, submitted at this stage to avoid any confrontation with the Department and to purchase peace (though without admitting any deliberate errors). We submit that your proposal to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 per cent is applied to the contract receipts it will be acceptable as the assessee is not in a position to collest information like addresses of sub-contractors and produce the personnels required for personal examinations, etc."
The said offer of the assessee was coupled with the condition contained in the later part of the same instrument at para 15 which reads as under:
"Interest paid and depreciation provided during the year The allowability of depreciation and the interest on borrowed fund being an inseparable liability fastened with the conducting of the activity deserves to be allowed. Necessary details for allowability of depreciation is attached."
Vide para 20 of the same instrument, the assessee has further submitted as under :
"......we have already furnished the desired details, informations and explanations and documentary evidences and also state that we have receipts from contract work of Indian Railways only which is credited through banking channel in the books of accounts. No part of receipts are from any source other than contract work from Railway. Excepting the internal movement of funds amongst directors, staff head and site offices for execution of contract work and other business related outgoing, we have no credit and debit of funds in the entire accounting period. Notations and jottings as indicated in the entire seized records which have relation with the assessee-company are absolutely within the expenditure claimed/receipts declared in the financial records and there being a total merger of seized records in the financial accounts no adverse inference may please be drawn. The notations and jottings are covered under 11 per cent NP rate."
5. From the above submissions and the request of the assessee, it is evident that the AO proposed to apply a net profit rate exceeding 11 per cent. This was not accepted by the appellant. The appellants while maintaining his stand that the accounts maintained by the assessee-company are based on the accounting policies consistently adhered to by the company, maintained before the AO that its accounts exhibit true and correct state of affairs of its income and it is only as an alternate proposal, the assessee gave a counter-offer to apply a profit rate of 11 per cent to the contract receipts which was subject to allowability of depreciation and the interest on borrowed funds as the same are inseparable liability fastened with the conducting of the activity. However, the explanation of the appellant to the questionnaire issued by the AO was not found satisfactory only for a few of the transactions though the same were not specified by him. The AO also invoked provisions of Section 145(2) without bringing on record as to what are the remaining transactions which he considers that the appellant was not able to explain to his satisfaction. The AO also did not prove or quantify the alleged suppression or inflation and no basis have been given to hold that the books of account have not been maintained in regular course of business. The AO chose to reject the accounts and applied a net profit rate of 11 per cent merely because he found the assessee in a fix and not for any cogent reasons or material in his possession. The AO has himself observed as under :
"Regarding profit estimation the assessee, has replied on p. 1 point 1 of its reply dt. 9th Sept., 1998, that the proposal of the Department to apply profit rate exceeding 11 per cent is very high and if profit rate of 11 percent is applied to the contract receipts, it will be acceptable as the assessee is not in a position to collect information like addresses of sub-contractors, etc. and also unable to produce all witnesses. The assessee further stated that the allowability of depreciation and the interest on borrowed funds being an inseparable liability fastened with the conducting of the activity deserves to be allowed."
It is, therefore, clear that the proposal of the assessee so made was a conditional proposal only and a counter-offer to the proposal made by the AO which came to be made as the appellant at relevant time was not able to collect information about such contracts or produce those personnels which was merely to purchase peace and avoid any confrontation with the Department. However, the AO is found to have chosen to assess @ 11 per cent by allowing depreciation alone and not the interest which was a condition precedent to the proposal made by the appellant and the AO's application of 11 per cent profit rate contending the same to be as agreed by the appellant, is not a correct view under the facts and circumstances of the case more particularly when the. AO could not have accepted and rejected the same instrument at the same time. It was necessary for him either to adopt the contents of the instrument as a whole or not to adopt the same. The offer of the AO was to apply a profit rate exceeding 11 per cent. He did not do that. The material on record also does not suggest an existence or availability of any acceptance or agreement by the appellant. We also find that the assessee did not indicate to the AO that he is giving up his right or statutory remedy to challenge the assessment order. The appellant neither acknowledged the liability nor did he make any assertion that the books of account do not disclose the correct income and it is under such circumstances, the appellant is found to be aggrieved and challenged the action of the AO before the learned CIT(A) which we hold to have been invoked rightly. We also find that the AO did not accept the profit rate of 11 per cent offered by the assessee, as he made a separate addition of Rs. 13,34,308 holding that the income from business activity has not been disclosed and the same was also sustained by the learned CIT(A). Keeping in view the entirety of the facts and circumstances and the findings and the observations, we hold that when the AO offered to apply a net profit rate of more than 11 per cent, the assessee had only alternatively gave a counter-proposal which, in fact, was not acted upon by the Department and as such, such an offer made thereof by the appellant is of no consequence and the same does not bind the assessee in any manner and accordingly it cannot be validly held that the instant assessment was an agreed assessment.
6. In the aforesaid paragraph, having come to the conclusion that the proposal made by the assessee is not a binding proposal and as such not an agreed assessment, the next question for our consideration is that what could be the reasonable profit that could have been applied on the basis of material on record and the submissions of the parties, On this issue the observations of the learned AM as well as the findings for arriving to the conclusion for application of profit rate of 8 per cent are contained in his order, paras 15 to 27 which are reproduced as under :
"15. After having held that this is not an assessment where the assessee has agreed to application of 11 per cent rate. We, therefore, proceed to find out the justification in applying the said rate of 11 per cent by the AO. The learned Departmental Representative before us has contended that the main annexure are annexures B and C of the audit report, which have lead to the application of the said profit rate. We have perused para 7 of the assessment order and find that the AO has also made a mention that Annexures B and C are the main annexures having major impact on the calculation of the correct profit of the company. We find that the AO himself has analysed each and every transaction with reference to the reply furnished by the assessee and he was of the firm opinion that the assessee could justify few transactions of these annexures. The AO, however, did not bring any material with respect to any of such remaining transactions with which he was not satisfied though admittedly the reply thereto was duly furnished by the assessee. Merely because some of the subcontractors could not be produced at the relevant time cannot lead to the conclusion of application of exorbitant rate of 11 per cent that too without giving a finding that the expenditure so claimed was not for business necessity or that it did not relate wholly and exclusively for the purpose of business to the carrying on of business as required under Section 37 of the IT Act. In fact, the AO did ask through various queries to give explanation but he has not stated basis of its estimate nor gave chance to the assessee to rebut basis he (sic) at the application of arriving at the precision rate of 11 per cent. The learned Departmental Representative filed annexure A to his letter dt. 2nd Jan., 2001, in supplement to the arguments advanced by him. This annexure contains various queries raised by the AO during the course of assessment proceedings on which our finding are contained hereinafter.
16. The query as regards to expenses on public issue, we find that a sum of Rs. 41.53 lacs stands debited to P&L a/c as per Schedule 12 of the balance sheet as reflected from paper book pp. 216 and 217 filed by the appellant. This amount is stated to be debited as per the accepted accounting policy of the company. The AO however, has not pointed out as to how much of the said expenditure does not pertain wholly and exclusively for the purpose of carrying of the business by the appellant more particularly when we find that an amount of Rs. 8,20,091 is also included in the said expenditure pertaining to the postal charges paid by the company and which are puma facie allowable for earning of interest income of Rs. 46.16 lacs by the assessee company as disclosed under the head "Other sources". However, we are not inclined to give our conclusive findings here as the issue of Rs. 8,20,091 is being agitated by the assessee under a separate ground. The claim of the assessee under Section 35D does not appear to have been quantified and allowed on this basis by the AO himself if he considered whole or part of the said amount pertain to the public issue incurred by the assessee. Having not done so, it stands to reason that the whole amount thereof cannot be made as a basis for including the same in application of the profit rate as made by the AO.
17. Similarly, the learned Departmental Representative has drawn a reference to the illegal payment to Railway officials, etc. We find that such payments, he himself has held to be extortious payment. Nowhere the AO has given any finding that the assessee made these payments wilfully or illegally. The extortious payments are nothing but payments made for business compulsions and the same being a business necessity cannot be said to be not deductible.
18. The issue of Benami investment in public issue stands duly replied by the assessee-company at paper book pp. 168 169 and 170. It was contended that 3 persons, namely, S/Shri B.P. Sharma, N.K. Bhardwaj and H.P. Sharma made a declaration before the learned CIT under VDIS 1997 regarding investment in the shares of the assessee-company in promoter's quota and the said disclosure had been accepted by the learned CIT as per copy of certificate placed at paper book pp. 139, 144 and 150. Since such disclosure has acquired finality, the same, therefore, cannot be held to be Benami investment as contended by the learned Departmental Representative without proving the same otherwise. The allegation of the AO that money adjusted in the account of the directors at the year end was used for investment in the promoter's quota of shares is without any basis and not tenable as the dates on which such advances appear to have been made with respect to some of the amounts relate to the period when the public issue which came on 14th June has already come to close on 18th June, 1994. It is not the case of the AO that the amounts so withdrawn have not been debited in the accounts of the company nor that there is no expenditure incurred by the directors for the business purposes of the appellant. In such circumstances the allegation appears to be unfounded and without any basis.
19. The interest-free advances stated to be given to directors stand duly replied by the appellant as per paper book p. 132. The record reveals that such advances are not Rs. 50 lacs but only Rs, 36,7 lacs. The circumstances under which the advances have been made have also been detailed, which inter alia, included the payments as required for meeting out the contingencies of the business since the work of the appellant is spread over to 19 sites. The said payments are duly accounted for and the account thereof has been rendered by the directors before the close of the annual account and expenditure incurred on that account has also been duly recorded in the books of account. The AO has not proved the inflation of expenses and, therefore, there is no material which could lead to application of higher rate of profit on this account. The learned Departmental Representative has also mentioned about inflated payments of Rs. 38 lacs. We have verified this allegation with reference to the reply furnished by the assessee at pp. 127 and 128. As referred in the preceding paragraph, such withdrawals are being made by the directors for meeting out business contingencies and necessities at different sites of the appellant-company as its works are spread over even to very small places where adequate facility of each and every material or supplies thereto are not available. Besides this, the AO having neither proved the inflation nor brought on record even a single transaction to show the suppression of profits, it cannot be said that the amounts so withdrawn by the directors and adjusted at the end of the year are inflated payments. In fact, in the accounting parlance and business circles the purpose of making imprest advance is to meet liability of the business on day-to-day basis for the convenient handling and accounting and to avoid day-to-day repeated withdrawals. Before the annual accounts are closed, an account of the imprest advance is taken from the person to whom it is so made. The appellant has resorted to the same practice which is prevalent in the business circles and nothing new has been done by him. The AO might not be aware of such a practice, and his ignorance could have aroused genuine suspicion. But it is settled law that suspicion howsoever strong cannot take the place of proof. No adverse inference thus could have been drawn by the AO.
20. The prior period expenses as pointed out by the AO also have been answered by the assessee at paper book pp. 123 to 125 and prepaid expenses at pp. 129 and 130 and also at p. 136. The assessee has also contended that it maintains a hybrid system of accounting with respect to such payments which was not opposed by the learned Departmental Representative during the course of hearing before us. The amount on such prior period expenses are only to the extent of Rs. 3.80 lacs. Since the amount so spent are not in deviation to the system of accounting applied by the assessee, there was no occasion for the AO to come to any different conclusion.
21. The capital expenditure of Rs. 63,259 is nothing but the payments made for expenditure on items of the assets purchased having a cost below Rs. 5,000 and under the provisions of the IT Act, the same are fully deductible.
22. With respect to Annexures A, B and C the AO has made only general observation. The assessee has also furnished reply to pp. 112 to 114 and each and every transaction appears to have been answered in detail. The AO has recorded his own satisfaction with reference to most of the transactions. This gives rise to satisfaction of the circumstances under which such payments have been made. However, the AO himself has not brought on record as to what are such balance payments, if any, about which he was not satisfied. The same also could not be taken as a basis to adopt an exorbitant rate of 11 per cent.
23. The learned Departmental Representative has also made a reference to the payments made to the politicians for Rs. 5,20,000 but such an allegation is without any substance and without bringing any material on record and is therefore, unfounded.
24. Annexure-AA/9 referred to by the AO has not been put-forth before the Tribunal. However, another Annexure AD-9 relates to the similar allegation as dealt in before us in the above paragraph and needs no comments. The AO's Annexure AKK-1 also appears to have duly been answered by the assessee at paper book p. 66.
25. Various other Annexures AD/25, AD 2/94, AD 1/3, AD 3/41, AD 4/18 and Annexures S-3 and A1/25 as referred by the learned Departmental Representative, we find that all such queries stand duly replied by the assessee at paper book pp. 42, 33, 55, 57, 58 and 59, respectively. We also find that the transactions in these annexures relate to certain debits made in the P&L a/c or payment allocations at sites proposed to be made or rough calculations or provisional figures of the results of the assessee-company. Annexure AD 1/3 is a personal note book of the Site Officer and the transaction out of that are not alleged to be incurred for the purpose of business. Another Annexure S-3, the AO has not brought any material on record as to whether any opportunity was afforded to the appellant and even whether he recorded any statement of such an employee and confronted the assessee with the same from whose house that paper was recovered. Having not done, it was not permissible to use the same against the appellant.
26. From para 3.3. of the order of the learned CIT(A), we also find that reliance has been placed on the statement of Mr. A.K. Solanki about net profit rate of 11.64 per cent. This has been done without bringing on record as to the circumstances under which such a statement has been made by the said person and as to what he meant by the net profit so informed nor the AO enquired into the correctness of veracity of such statement. Nothing has been brought on record as to how the said rate of 11.64 per cent has been stated by the said Shri A.K. Solanki and what were the basis of stating the rate of 11.64 per cent. What was his authority to make such a statement has also not been enquired. All these questions remain unanswered and as the AO himself did not strictly applied the rate so stated by him, no credence can be given to such a statement for applying rate of 11 per cent by the AO in the case of the appellant, more particularly when the same was not produced before the Tribunal also when asked to do so.
27. From the various replies furnished by the assessee and from the findings of the AO in the assessment order, it cannot conclusively be said as to what are the remaining payments which could be said not to have been incurred wholly and exclusively for purpose of carrying on of the business as the assessee has been able to substantiate its claim before the AO. We also find that nowhere in the assessment order the AO made it clear as to how he has arrived at the surgical precision rate of 11 per cent. Even if in the absence of any supporting vouchers the AO was justified in invoking provisions of Section 145 of the Act, though not challenged by the appellant before us, it did not mean that he had got abundant power to make the additions or estimation at his sweet will. It is settled proposition of law that assessment is a quasi judicial proceedings in which the personal will or rough estimation did not have any place. The AO is bound to disclose the mental process through which he arrived at a particular figure of income as his orders are being subjected to appeal and, therefore, should have been speaking one. It is evidenced from the past history of the appellant that never a profit rate of more than 7 per cent was applied in the case of the appellant, more particularly when two of the past assessments have already been completed as a consequence of the search and incriminating documents as alleged in the year under appeal were also available with the AO in those assessments. Keeping in view the peculiar circumstances like nature of business, expenses on public issue, etc. in the year under appeal, the assessee's own history for the earlier years, overall facts findings and circumstances of the case, suppression of profits having not been established, allegations having not been proved, explanation rendered by the appellant and the legislative history, we find that there was no justification in applying or confirming net profit rate of 11 per cent which we hold that the ad hoc application of 8 per cent net profit rate subject to allowability of depreciation and interest thereon in the case of the assessee was justified in order to cover all the discrepancies, errors and allegations found through the transactions recorded in the books or the loose papers so found and seized from the premises of the appellant or its directors and accordingly direct the AO to recalculate the income of the appellant."
7. The learned Departmental Representative only refers to the statement of Shri Ashok Kumar Solanki and the relevant question and reply relied upon by him are as under :
"Q. 38 What is the income of the company from the contract work usually ?
Ans. According to my knowledge approximately 10 per cent to 15 per cent to the total receipts."
The above statement was taken at the time of search without confronting Shri Solanki with the books of account or any contract work specifically. The question posed to him was not for the specific income of the year under consideration nor for the income from total contract work of the assessee. There was no clarification taken by authorized officer or by the AO as to the fact whether the said Shri Solanki was stating so in respect of any of a single venture forming part of the one and individual business of the appellant comprised of several contract works secured by it, for which the assessee has maintained a combined P&L a/c or it was only a hypothetical calculation. The affidavit filed before the AO of the same person was also not found false. The statement so given before the authorized officer was thus not a conclusive statement as the same was not based on any material on record but was only on approximation basis and not relevant to the facts of the case. This statement also did not quantify any correct rate as to whether 10 per cent or 11 per cent or any higher rate. It is, therefore, the statement so given by Shri Solanki is of no credence and the same cannot be used against the assessee for applying a profit rate of 11 per cent which was not supported by any material or basis and was contrary to the facts of the case. Having regard to the entirety of the facts and fully agreeing to the findings as well as observations contained in the order of the learned AM, at para 15 to 27 referred hereinabove we agree that for the same reasons and on the basis of the material on record and the submission made by the parties, the application of profit rate at 8 per cent subject to allowance of depreciation and interest thereon is quite reasonable and the same shall cover all the discrepancies, errors allegations done through the transactions recorded in the books or loose papers found and seized from the premises of the appellant or its directors and accordingly the AO shall recalculate the income of the appellant. Accordingly ground Nos. 1 and 2.5 stand disposed of.
8. In grounds No. 2-2.4, the assessee has challenged that the AO is not justified in not allowing deduction of interest payment of Rs. 38,06,090 from the profit rate applied by him. The facts and findings of the Tribunal are contained in para 29 of the learned AM's order on which we fully agree and for the unanimity amongst the members and reasons contained therein, the grounds of the assessee stand allowed.
9. Ground No. 3 in terms of para 30 of the AM's order forming part of this order on which there was unanimity amongst the Members, the ground stand dismissed as infructuous.
10. Ground Nos. 4, 5, 6 and 7 relate to the addition of Rs. 13,34,308 on account of interest paid as per Annexure AD-28/10 seized from the assessee. The addition on account has been directed to be deleted vide para 33 of the order forming part of this order. As a result the assessee's grounds stand allowed.
11. Ground No. 8 of the assessee in terms of order vide para 34 of the order forming part of this order stands disposed of.
12. In ground No. 9, the Tribunal directed the AO to charge interest under Section 234B on the total income as returned by the appellant and not on the income so determined by the AO. In accordance with the order forming part of this order, the ground of the assessee, therefore, stands allowed.
13. Ground Nos. 10.1 and 10.2 were restored back to the learned CIT(A) as per directions contained in para 38 of the order forming part of this order. The grounds so raised by the assessee, therefore, stand disposed of.
14. Ground Nos. 11 and 12 stand dismissed as the same were not pressed.
15. The orders of the learned AM, learned JM, dt. 26th July, 2001, and the order of the Third Member dt. 22nd May, 2002, shall form part of this order.
16. As a result the appeal of the assessee stands partly allowed.