TaxTMI 
TaxTMI 
TaxTMI 
2006 (3) TMI 232
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....der the company law. (3) Learned Assistant Commissioner of Income-tax is erroneous in not appreciating the accepted accounting practice of maintaining overhead accounts in the head office and registered office and maintaining direct expense accounts in various contract sites. (4) Learned Assistant Commissioner of Income-tax is unrealistic in observing that different contract works have not produced uniform gross profit margins. It is impractical to expect uniform gross profit margins in two different works when such works are different in nature, place of execution and other specifications, besides being in different phases and stages of completion. (5) Learned Assistant Commissioner of Income-tax is erroneous in law in concluding that book results of the appellant are unreliable simply on account of some vouchers being not supported by evidence. (6) Learned Assistant Commissioner of Income-tax was not appreciative in not accepting system of assigning job works on the basis of prevailing market rates based on proper negotiations by the appellant. (7) Learned Assistant Commissioner of Income-tax has not properly appreciated the system of sub-contracting and ignored the leg....
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....tion 145 he estimated the profits of the assessee at 12.5 per cent of the gross bills before depreciation while considering the commission earned by the assessee on the sub-contract works separately. The assessment was thus completed on a total income of Rs. 2.79 crores. Not satisfied, the assessee went in appeal to the Commissioner of Income-tax (Appeals) who upheld the action of the Assessing Officer. Aggrieved, the assessee is in appeal before us. Assessee's submissions: 3. The learned counsel for the assessee submitted as follows: The reasons listed out by the Assessing Officer in his assessment order for rejecting the book results of the assessee are not legally sustainable and do not in any way warrant for rejection of the book results by invoking provisions of section 145(3). The assessee is a Public Limited Company complying with the provisions of Company Law and the provisions of Income- tax Act with respect to maintenance of accounts and audit of such accounts. Accounting standards prescribed by the Institute of Chartered Accountants of India have been complied with as per section 211 of the Companies Act, 1956. Similarly, accounting standards prescribed under secti....
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....pute, which made him invoke section 145(3) was the assumption that the assessee's accounts were incomplete and incorrect. However, he could not substantiate anything to prove that its accounts were incomplete and incorrect for the following reasons: (1) Learned Assessing Officer called for separate Profit & Loss Accounts in respect of each work site of our company. The assessee produced the same for his verification, which by itself amply substantiates the comprehensive and methodical system of accounting followed by the assessee. On verifying such site-wise Profit & Loss Accounts, the learned Assessing Officer came to a wrong conclusion that such working results were not reliable on the basis that administrative overheads incurred at the Head Office, were not debited to the concerned work site accounts. (2) It is very strange that the learned Assessing Officer overlooked the accepted accounting practice of computing only one direct revenue and direct expenditure results at any work site. In other words, no administrative overheads would be considered while examining working results of various contract sites and only direct expenditure would, be considered. This basic accou....
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....n by the Assessing Officer making such attempts. It was held by the Hon'ble Pune Bench of the Tribunal that an Assessing Officer is not required to examine separate trading account for each commercial contract. It was held that only the consolidated Profit & Loss Account needs to be examined as to its authenticity and completeness from the provisions of section 145. (7) Any consistent accounting methodology accepted by the Assessing Officer in the past cannot be found fault for making a ground to reject the books of account of an assessee. 3.2 The attempt of learned Assessing Officer to project this issue as one of the reasons for rejection of books, clearly demonstrates that there was no proper appreciation 6f the facts of the case and simultaneously, the learned Assessing Officer could not quantify any particular item of deduction as disallowable item for the tax purposes. In other words, learned Assessing Officer could not pinpoint any specific item in the working results of different contract sites for a specific addition in the assessment as disallowable item of expenditure etc. This clearly supports our argument that a very convenient approach of rejecting the book res....
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....red as specific addition in our assessment. The general comment of the Assessing Officer clearly demonstrates that he could not quantify any specific expenditure as unverifiable which warrants for an addition in the assessment. Inaction on the part of Assessing Officer to specifically quantify unverifiable expenditure for a specific addition in the assessment cannot empower such an Assessing Officer to resort to rejection of book results by invoking section 145. This particular reason relied upon by the Assessing Officer for rejecting the book results is legally unsustainable as the same is not establishing any incompleteness or incorrectness in our accounts. 3.6 Judicial precedence is categorically in favour of an assessee in this context by holding that such actions of Assessing Officers were held to be legally untenable. 3.7 Absence of vouchers or the supporting evidence in respect of a particular item of expenditure cannot by itself empower an Assessing Officer to invoke provision of section 145(3) in rejecting the books of account. Amritsar Bench of the Hon'ble Tribunal in Ashok Kumar & Co. v. ITO [2004] 2 SOT 518 (Asr.) (SMC) held that rejection of books cannot be resto....
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.... job work rates. The same was projected as a reason to reject our book results. It was submitted by us during the assessment proceedings that in such a petty and labour oriented job works, there cannot be any standardization of job work charges. Such petty job works cannot be organized through any quotations, tenders etc. It is very common and practically accepted that all contractors like us avail the services of job workers on the basis the then requirements at our work site. Practically there will not be any time or opportunity to bargain with many job workers or conduct screening of various rates that may be quoted by the job workers before finalizing any work to be assigned to such job worker. It is impractical to expect such a situation in respect of job works that would be assigned by any civil contractor. Undoubtedly, we bargain before finalizing the rate and assign the job to such job workers. 3.9 No prudent businessman will ever lose out by not making a proper bargaining in a commercial transaction. If we delay the process of getting the job works done on time by waiting to get better rates from job workers, we will be put to a bigger loss in completion of the overall c....
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....1e name of the main contractor, who in turn will release such payment after deducting his commission to the sub-contractor. To this effect, a valid sub-contract agreement would be in place. It is the subcontractor, who maintains the accounts for the entire work taken by him on sub-contract basis. The same would become his turnover and he would be liable for tax against income on such contract work. The commission paid to the main contractor would be claimed by such sub-contractor as his business expenditure. The main contractor's role is simply collecting the payments from the contractee department and passing on the same to the sub-contractor after deducting his commission as per the terms of sub-contract agreement. Thus the main contractor is in no way responsible for maintenance of accounts with respect to such work. He will only make simple entries of receipts from the contactee department and the payment to be made to subcontractor in his account. This popular and acceptable method of accounting was not appreciated at all by the Assessing Officer and it was strangely observed by the learned Assessing Officer that the assessee did not produce evidence against payment made t....
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....ing April, 2001, it was submitted that the Assessing Officer drew his conclusion without going into details of the work billed. A conclusion based on value is totally wrong. The assessee gave details of the work carried out in the written submissions submitted before us. With regard to the running bill for Rs. 32,98,242 pertaining to Building at Jagdalpur, it was submitted that the works involved were plastering, surface treatment involving application of oil based distemper (6275 Sq.ms.), application of cement based paint (2150 Sq. ms), supplying and fixing of ceramic and glazed tiles (508 Sq. ms), supply and laying of Kota stone flooring (365 Sq.ms) and skirting (423RMs), supply and fixing of Udaipur stone in steps skirting etc. (60 Sq. ms), supply and fixing of sanitary items, supply and fixing of water supply items, supplYaI1d fixing of internal electrical items, cables, earthing wires, supplying and fixing of wires for UPS, etc. In all the above the work consisted of both supply of items and laying fixing etc., i.e., labour work. A major part of the billing is towards the cost of materials supplied. The items are procured as and when required and were not stocked. The labour i....
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....rtaken during the year 2000-01 are completed to the maximum possible extent and billed in the same year, resulting in lesser amount of closing work-in-progress as at 31-3-2001. 3.16 It was also explained that the contractee departments mostly being a Governmental agency will have specific budget allocations and such departments are expected to exhaust their budgets before 31st March of each year which has also been explained to the Assessing Officer. This was the reason why the assessee's closing work-in-progress has come down to a Rs. 5,49,777. It may be noted that, the work-in-progress as at 31-3-2000 was also Rs. 21,50,539, supporting its earlier explanation in this regard. The observation of the Assessing Officer that work-in-progress in respect of works sub-contracted are supposed to be accounted in assessee's books. This observation by the Assessing Officer is basically incorrect and is against accepted accounting policies. No main contractor like the assessee, would account for the expenditure from the work-in-progress of a work that is sub-contracted, in assessee's accounts. This wrong observation by the Assessing Officer was projected as a justifying reason to....
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....n 52 (Ahd.) (Mag.) (3) Malu Khan & Party v. Dy. CIT [2004] 1 SOT 281 (Jodh.). The learned counsel submitted that the assessee has been consistently following the method of accounting including accounting of sub-contract from year after year. Its system of accounting was accepted and was not found at fault by the earlier Assessing Officers in respect of past years that have come for scrutiny. The Assessing Officer erred in treating commission receipts from sub-contractors and miscellaneous receipts as net income instead of treating them as part of total receipts. In other words, commission received against sub-contracts and miscellaneous receipts would also form part of turnover and cannot be directly considered as income. Concluding his arguments, the learned counsel pleaded for quashing the assessment made by the Assessing Officer and sustained by the Commissioner (Appeals) as it is legally unsustainable, deleting all the additions made and directing the Assessing Officer to accept income returned by it. Reliance was also placed on the following decisions: (1) Pushpanjali Dyeing & Printing Mills (P.) Ltd. v. Jt. CIT [2001] 72 TTJ (Ahd.) 886. (2) ITO v. Mangalam Chemicals [....
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....-contract works, the assessee did not have any evidence in support of the expenditure claimed by debiting to the profit and loss account except mentioning that they were entitled to fixed rate of commission and the balance should be treated as expenditure. He pointed out that as the expenditure is directly debited to the profit and loss account of the assessee-company it was his duty to produce evidence in support of such expenditure claimed. It is further mentioned that the commission received by the assessee was subject to deduction of expenses incurred under other over-heads. On work-in-progress he submitted that while the work-in-progress as on 31-3-2001 was Rs. 49,777 it is seen that the assessee-company raised bills amounting to Rs. 1,45,30,926 in the month of April 2001. Thus from this it can be construed that the assessee has not disclosed the work-inprogress properly. He vehemently contended that the Assessing Officer took care to examine each and every variation as well as each and every claim made by the assessee and has come to the correct conclusion that the books have to be rejected in terms of section 145 of the Income-tax Act. As regards the case laws relied on by t....
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....shed the case laws relied upon by the Department in his rejoinder. 5. Contentions heard. On a careful consideration of the facts and circumstances of the case, we are of the considered opinion that the submissions of the learned counsel for the assessee are having considerable force as compared to the findings of the revenue authorities for the following reasons. 5.1 Though several grounds have been raised by the assessee, the crux of the matter revolves round rejection of assessee's books of account and estimate of profit on execution of work and consideration of income from sub-contract works given to others separately by the Assessing Officer. In this case as already stated, the assessee in its return of income filed declared an income of Rs. 99,61,800 whereas the income determined by the Assessing Officer was Rs. 2,79,93,220. While doing so, the Assessing Officer rejected the assessee's book results by invoking the provisions of section 145(3) and estimated the profit at 12.5 per cent for the following reasons: (1) The assessee-company maintained separate accounts in respect of works executed for each site but the administrative expenditure incurred in offices at Ba....
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....completely verifiable in the absence of vouchers with supporting evidence, he could not pinpoint the heads of expenditure nor quantify such expenditure that was not supported by evidence in spite production of all material by the assessee. In assessee's line of business certain items of expenditure to a small and reasonable extent cannot be supported with proper external evidence for example certain labour payments and purchase materials such as bricks, sand etc. It has to be seen whether such expenditure is within the acceptable limits of reasonableness. It is imperative for the assessee to incur such expenditure and such expenditure cannot be disputed by the assessing authorities. Reasonableness of the expenditure should be judged from the view point of the business carried on by the assessee and not from the view-point of the revenue authorities. As regards the sub-contract works, the contention of the assessee was that it is the sub-contractor, who will execute the work as per the-specifications given by the main contractor. But the main contractor will be accountable to the contractee for proper executions of the work. It is the sub-contractor who maintains the accounts fo....
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.... ITD 125 (JP.)(TM) it was held by the Tribunal that loss gross profit ratio cannot be a reason to reject the books of account. 5.4 The Amritsar Bench of the Tribunal in the case of Ashok Kumar & Co. v. ITO [2004] 2 SOT 518 (ASR)(SMC) held that rejection of books cannot be resorted simply on the basis of absence of some vouchers and failures to produce the same by the assessee. The Kerala High Court in the case of C.M. Francis & Co. (P.) Ltd v. CIT [1970] 77 ITR 449 (Ker.) held that where purchase vouchers for agricultural produce purchased from agriculturists could not be produced, books of account cannot be rejected in total on the basis of such finding. Again the Allahabad High Court in the case of Imran Ahmed v. CIT [1982] Tax LR (NOC) 111 (All.) held that on account of mere absence of vouchers to substantiate entries for the accounts, accounts in total cannot be rejected. It is well-settled that reasonableness of expenditure should be judged from the view point of the business carried on by the assessee and not from the view point of the revenue authorities [(Voltamp Transformers (P.) Ltd v. CIT [1981] 129 ITR 105, 113 (Guj.) and CIT v. Dalmia Cements (Bharat) Ltd [2002] 254 I....
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....that arises is whether it would be justified on the principles of consistency to uphold the accounts of the assessee. No doubt the courts have held that though the doctrine of res judicata does not apply, in particular, to income-tax proceedings. Nevertheless at the same time, the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC) declared that though the principles of res judicata do not apply to income-tax proceedings each assessment year being a unit by itself, yet in cases, when a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have been allowed that position to be sustained by not challenging the order, it may not be appropriate to allow that position to be changed in a subsequent year. Their Lordships extracted with approval the following passage from Hoysted v. Commissioner of Taxation [1926] AC 155 (PC): "Parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction....
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....ogent and sufficient reasons or change in facts or law we have to necessarily apply the principles laid down by the Apex Court in the case of Radhasoami Satsang and hold that unless the fundamental aspects permeating through different assessment years are different, a different view possibly cannot be taken as it would result in anomalous results. 5.9 With this background, we again examine the reasons given by the Assessing Officer for rejection of books of account. As already stated, the Assessing Officer has accepted the factum of expenditure on account of sub-contractors and thus the nonavailability of vouchers of expenditure incurred by sub-contractors with the assessee cannot be a reason for rejection. Coming to the site-wise profit and loss account which are claimed to be MIS reports, the fundamental aspect is that each of these works is at different stages and phases of completion. The works are of different nature and a comparison of such different works for estimating profits of such works, based on the MIS reports which are not complete, in the sense that administrative expenses and other direct expenses incurred in respect of each work or as overhead find place in the b....
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....sonable. But to reject the entire books of account on the basis that they are some self-made vouchers for labour, material, transport, etc. cannot be countenanced. Even in Government offices most of the expenditure which is petty in nature and which involves casual labour can be expected to have self-made vouchers. These vouchers can only be justified through circumstantial evidence. Reasonableness of the claim of expenditure under each head may be a matter of adjudication but not rejection of books. The Hon'ble Kerala High Court in the case of C.M. Francis & Co. (P.) Ltd. v. CIT [1970] 77 ITR 449 held as follows: "... that the fact that the assessee did not obtain bought notes from the sellers in respect of its trade in arecanuts was not a defect by itself or something which die assessee could have helped, since the sellers were agriculturists from whom it was not possible in-the ordinary course of business to obtain vouchers and also the fact that the maintenance of bought notes by the purchasers was the common feature in the assessee's line of business. Further, no case had been made out that the purchases were inflated or bogus purchases had gone into the assessee'....
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....ed is correct. The assessee has justified the work-in-progress figures disclosed by it in its accounts. The Assessing Officer has not item-wise rejected the reasoning. He has also not bothered to point out as to how it can be said that reasons and data furnished by the assessee are wrong and false. General observation is made based on certain prima facie impressions without going into the root of the matter. The first appellate authority has also not rebutted these workings. Thus the observations of the Assessing Officer that the work-in-progress has not been correctly disclosed or that it was not possible to verify the same is erroneous. Thus, such an erroneous decision cannot form the reason for rejection of the books of account. 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 b....
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....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 ....