2006 (3) TMI 232 - AT - Income Tax

Tribunal Overturns AO's Rejection, Orders Acceptance of Book Results for Assessment u/s 145.

Vishal Infrastructure Limited. Versus Assistant Commissioner Of Income-tax, Circle 3 (4), Hyderabad.

The Tribunal allowed the appeal by the assessee, overturning the AO's rejection of the book results and the income estimation under section 145. The ... Method Of Accounting - rejection of books of account - estimate of profit on execution of work - consideration of income from sub-contract works given to others separately - work-in-progress - HELD THAT:- The reason given by the Assessing Officer that the job work charges paid for some of the job works by the assessee are not convincingly supported by proper workings also does not entitle him to reject the books of account. These items of job works can be quantified separately and disallowance made, in case the assessing authority felt that proper justification was never made in these job works. The opinion of the Assessing Officer is not supported by proper analysis. Just making a statement that the job assigned by the assessee, was not convincingly supported by proper working without showing the basis for reasons and the data relied upon by the Assessing Officer to come to such conclusion, does not authorize rejection of books of account. All job works are small time jobs and the workers are employed on the spot at times to undertake the jobs and it is for the businessman, depending on the situation, to arrive at the cost, necessity, urgency etc. The Assessing Officer should view this expenditure from the businessman's point of view. We are of the considered view that the 1st appellate authority has committed an endorsing this view of the Assessing Officer. Work-in-progress - The assessee based on facts and figures with cogent material has demonstrated before us that the works undertaken during the year 2000-01 are completed to the maximum possible extent and have been billed in the same year and thus it resulted in lesser closing work-in-progress as on 31-3-2001. The case laws relied on by the first appellate authority is not applicable to the facts of this case inasmuch as nothing is said on the material and data produced by the assessee before the Commissioner of Income-tax (Appeals). Each case law turns on its peculiar facts and circumstances. Unless the appellate authority rejects with cogent reasons the claims and data as well as material produced before it by the assessee a conclusion should not have been drawn by applying various case laws. The assessing authority has to look into the substance of the situation and decide the matter in such a manner that neither is put to unreasonable liability nor the assessee is subjected to unreasonable hardship. No doubt it is not only the right but also the duty of the Assessing Officer to consider whether or not the books disclosed the true state of accounts and the correct income can be deduced therefrom. But these right and duty have to be exercised in such a manner and have to be based on cogent reasons and sufficient material. The reasons given by the Assessing Officer in this case on the facts and circumstances is demonstrated, as erroneous by the assessee. Rejection of books of account should not be done light heartedly as held by the Kerala High Court in the case of St. Teresa's Oil Mills v. State of Kerala [1970] 76 ITR 365 and by the Assam High Court in the case of Tolaram Daga v. CIT [1966] 59 ITR 632. Accounts regularly maintained in the course of business have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable and incorrect. The Department has to prove satisfactorily that the account books are unreliable or incorrect or incomplete before it can reject the accounts and this can be done by showing that important transactions are omitted or if proper particulars and vouchers are not forthcoming or the accounts do not include entries relating to a particular class of business. When a return is furnished and accounts are put in support of that return, the accounts should be taken as the basis for assessment. They should not be rejected because they are complicated. The procedure of the Assessing Officer, is of judicial nature and in making the assessment should proceed on judicial principles. If evidence is produced by the assessee in support of his return it should be accepted unless it is rebutted by admissible evidence and not by mere hearsay. Thus for all these reasons and as the assessee has produced sufficient material justifying its claim and as it has repelled the contentions advanced by both the Assessing Officer and the first appellate authority with cogent material and evidence, we have to necessarily uphold his contentions. We, therefore, direct the Assessing Officer to accept the book results shown by the assessee and complete the assessment based on these book results. Thus we allow the appeal filed by the assessee. Issues Involved:1. Rejection of book results under section 145.2. Estimation of profit at 12.5% of gross receipts.3. Maintenance of overhead accounts and direct expense accounts.4. Variability in gross profit margins across different contract works.5. Reliability of book results due to unsupported vouchers.6. System of assigning job works based on prevailing market rates.7. Accounting of sub-contracts and the legal purport of various sub-contracts.8. Proper statement of closing work-in-progress.9. Treatment of commission received from subcontractors and miscellaneous receipts.10. Deduction of material recoveries from gross bills in arriving at contract receipts.11. Justification of the Commissioner of Income-tax (Appeals) in concurring with the Assistant Commissioner of Income-tax.12. Application of provisions of section 145 and estimation of income.13. Request to quash the order passed by the Assistant Commissioner of Income-tax.Detailed Analysis:1. Rejection of Book Results Under Section 145:The assessee argued that the reasons listed by the Assessing Officer (AO) for rejecting the book results were not legally sustainable. The assessee, being a Public Limited Company, complied with the provisions of Company Law and the Income-tax Act, including maintenance and audit of accounts. The AO's rejection was based on the assumption that the accounts were incomplete and incorrect, which the assessee disputed, citing compliance with accounting standards and the absence of qualifications by auditors.2. Estimation of Profit at 12.5% of Gross Receipts:The AO estimated the profits at 12.5% of the gross receipts before depreciation, citing discrepancies in the accounts. The assessee contended that this estimation was unjustified as the AO did not substantiate the claim that the accounts were incomplete or incorrect. The Tribunal noted that the AO did not pinpoint any specific item of deduction as disallowable and relied on general observations.3. Maintenance of Overhead Accounts and Direct Expense Accounts:The AO criticized the assessee for not incorporating administrative overheads incurred at the Head Office into site-wise accounts. The assessee explained that it was standard accounting practice to compute only direct revenue and direct expenditure results at any work site, without considering administrative overheads. The Tribunal found this approach reasonable and consistent with accepted accounting practices.4. Variability in Gross Profit Margins Across Different Contract Works:The AO observed that different contract works did not produce uniform gross profit margins. The assessee argued that it was impractical to expect uniform margins due to the varying nature, location, and stages of completion of different works. The Tribunal agreed that expecting uniform profit margins was unrealistic and not a valid reason for rejecting the book results.5. Reliability of Book Results Due to Unsupported Vouchers:The AO noted that some vouchers were not supported by evidence. The assessee countered that certain expenditures, such as labor payments and material purchases, might not always have external evidence but were reasonable and necessary. The Tribunal held that the absence of some vouchers should not lead to the rejection of the entire books and that specific unverifiable expenditures should be considered for disallowance instead.6. System of Assigning Job Works Based on Prevailing Market Rates:The AO questioned the job work charges paid by the assessee, suggesting they were not convincingly supported. The assessee explained that job works were assigned based on prevailing market rates and negotiations. The Tribunal found the AO's general comments insufficient and noted that the AO should have identified specific job work charges for disallowance if they were deemed unreasonable.7. Accounting of Sub-Contracts and the Legal Purport of Various Sub-Contracts:The AO criticized the assessee for not producing evidence against amounts debited as payments to subcontractors. The assessee explained that sub-contracting was a common practice, with the main contractor receiving a fixed commission and the sub-contractor executing the work. The Tribunal found the AO's rejection of sub-contract agreements unjustified and noted that the AO accepted the commission as income, thereby implicitly accepting the expenditure claimed.8. Proper Statement of Closing Work-in-Progress:The AO inferred that the closing work-in-progress was not properly stated, based on bills raised in April 2001. The assessee provided detailed explanations and justifications for the closing work-in-progress figures. The Tribunal found the assessee's explanations reasonable and held that the AO's adverse inference was not substantiated.9. Treatment of Commission Received from Subcontractors and Miscellaneous Receipts:The AO treated commission received from subcontractors and miscellaneous receipts as income rather than receipts. The assessee argued that these should be part of the total receipts. The Tribunal agreed with the assessee's contention.10. Deduction of Material Recoveries from Gross Bills in Arriving at Contract Receipts:The AO did not deduct material recoveries from the gross bills in arriving at contract receipts. The Tribunal did not specifically address this issue in detail but implied that the AO's approach was incorrect.11. Justification of the Commissioner of Income-tax (Appeals) in Concurring with the Assistant Commissioner of Income-tax:The Commissioner of Income-tax (Appeals) upheld the AO's actions. The Tribunal found that the Commissioner did not properly appreciate the facts of the case and endorsed the AO's actions without sufficient justification.12. Application of Provisions of Section 145 and Estimation of Income:The Tribunal concluded that the AO's rejection of the book results and estimation of income under section 145(3) were not justified. The Tribunal emphasized that the AO did not dispute the method of accounting or compliance with accounting standards and that the rejection was based on incorrect assumptions.13. Request to Quash the Order Passed by the Assistant Commissioner of Income-tax:The Tribunal allowed the appeal filed by the assessee, directing the AO to accept the book results shown by the assessee and complete the assessment based on these book results. The Tribunal found that the assessee had produced sufficient material justifying its claims and had repelled the contentions advanced by the revenue authorities.Conclusion:The Tribunal allowed the appeal filed by the assessee, quashing the AO's rejection of the book results and the estimation of income. The Tribunal directed the AO to accept the book results and complete the assessment accordingly, emphasizing the importance of consistency and proper evaluation of evidence.