TaxTMI 
TaxTMI 
2006 (3) TMI 232
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....lant is a limited company and got its accounts audited under 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 ....
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....relied upon for arriving at the correct taxable income. In view of these deficiencies, he rejected the books and applying the provisions of section 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....
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....s evident from the assessment order that the Assessing Officer was not in dispute with the method of accounting followed by the assessee or compliance with the accounting standards prescribed under the Income-tax Act. The only dispute, 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 r....
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....prehensive analysis and draw appropriate and correct inferences. (6) Learned Assessing Officer is not legally permitted to sit in judgment as to what is a low profit and what is a high profit in respect of particular activity. Judicial precedence have frowned upon 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 ....
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....is basic approach of judicious evaluation projected the same issue as a warranting reason for rejection of our book results. In such a scenario, if the learned Assessing Officer is in dispute with any particular item of expenditure as unverifiable, the same item should have been considered 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 part....
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.... Officer for rejecting the books as legally unsustainable proposition. 3.8 Coming to job work charges, he submitted that learned Assessing Officer observed that job work charges paid for some of the jobs assigned by the assessee was not convincingly supported by a proper working out of the 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 j....
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....fixed commission from the sub-contractor. It is the sub-contractor, who will execute the work as per the specifications given by the main contractor. Anyhow, the main contractor will still be accountable to the contractee authorities for proper execution of the work. All payments would be made only in tl1e 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 conta....
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....f Rs. 1,45,30,926 is absolutely possible and realistic. From this the Assessing Officer cannot draw an adverse inference. 3.14 As regards the building work at Jagdalpur and the crane storage building at Pune, it was clarified that the position in respect of these two major works which were carried out during 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, ear....
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....he works were expedited and completed to the maximum possible extent and billed immediately so that the budget of the Government departments for whom works are done, are exhausted to the fullest extent. This argument is substantiated with the huge billing in the month of March, 2001 as compared to earlier two months. Thus the works undertaken 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 observati....
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....ficer had not observed at any point of time that there were incomplete or incorrect recording of transactions in assessee's books of account. Among others, he placed strong reliance on the following decisions: (1) S. Gurlal Singh Tuli v. Asstt CIT [2000] 73 ITD 365 (Nag.) (2) Asstt. CIT v. L.M.P. 'Tractors (P.) Ltd [2005] 148 Taxman 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 Ass....
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....s. 3, 4, 5 and 6 of the assessment order and submitted that percentage of profit between various works varied - between loss to more than 46 per cent as in the case of CIAL works at Cochin. He specifically relied on paragraph under the heading 'acceptability of accounts' at pages 6, 7 and 8 of the assessment order and submitted that specific findings are given that there was mixing of accounts/materials between various sites. He specifically contended that in respect of sub-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-com....
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....993. - Order dated 24-4-1996] (Bench 'B'). (c) M/s. Krishnamohan Constructions, Hyderabad v. Asstt. CIT, Central Circle I, Hyderabad [IT Appeal Nos. 380 and 381 (Hyd.) of 1994 for assessment years 1991-92 and 1992-93 (Bench B - Order dated 20-3-1998)] On a query from the Bench as to how the income from the subcontractors were estimated, he submitted that only the commission in respect of sub-contractors were considered as income of the assessee as per page 10 of the assessment order. The learned counsel for the assessee distinguished 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....
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.... Officer was not able to pinpoint any specific item in the working results of different contract sites for a specific addition in the assessment as disallow able item of expenditure etc. The comment of the Assessing Officer that profits in respect of different sites were either too low or too high are not borne out of facts as this assumption is wrong for the reasons pointed out by the assessee and these reasons do not form sufficient basis to reject the book results. Except giving a very casual comment that the expenditure debited to the P&L Accounts prepared in respect of various sites was not 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 assess....
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.... the contentions of the assessee especially when the Assessing Officer did not dispute the method of accounting followed by the assessee and compliance of the accounting standards prescribed under the I.T. Act. While coming to this conclusion we are supported in our view by the following decisions. 5.3 The Pune Bench of the Tribunal in the case of Asstt. CIT v. Mahesh T. Patodia [2001] 79 ITD 40 (Pune) held that only the consolidated profit and loss account needs to be examined as to is authenticity and completeness from the provisions of section 145. In the case of Triveni Pharma v. ITO [2005] 92 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, b....
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....ult with. Auditors of the Company both under the Companies Act and the Income-tax Act have been consistently certifying that the assessee has been regularly following the method of accounting and that the annual profits can be properly deduced from such method of accounting employed by the assessee. The auditors over the years have also been certifying that the accounts are regularly maintained and are complete in the sense that there is no significant omission therein. This finding has been accepted by different Assessing Officers over a period of seven years. On these facts and circumstances, the question 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 ass....
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....vil contractor who undertakes major works, a contract is spread over several years. The income arising from the same contract is spread over several assessment years and part of the profit of this contract is separately arrived at assessment year-wise and brought to tax. While so, for the same contract, the books of account are accepted for certain assessment years for the purpose of arriving at the profits, and for certain other assessment years the books of account are rejected in respect of the very same contract part of which is executed this year and the profit is estimated on a different basis. When this is done without cogent 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 ....
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....ting that the expenditure is not verifiable without pinpointing any vouchers specifically when the assessee is disputing such a finding and is producing evidence to counter the findings of the Assessing Officer, could not be a valid reason for rejection of books. As already stated, depending on the nature of work certain percentage of vouchers are bound to be self-made or local purchase vouchers. In such cases, the expenditure claimed on such vouchers can be evaluated on the basis of reasonableness and the Assessing Officer has all the powers to disallow a certain percentage of such expenditure if he finds that the claims are unreasonable. 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. F....
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.... 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. 5.12 Coming to the issue of work-in-progress, the assessee's arguments have been bought out in paras 3.13 to 15 of this order. The assessee has fully justified and has given cogent and valid reasons. A plain reading of these reasons and working show that the work-in-progress disclosed 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-....
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....ead to certain discrepancies. Such minor discrepancies are not reason enough for the Assessing Officer to reject the books of account. 5.14 Section 145(43) has been specifically relied upon by the revenue in this case. It reads as follows: "Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." 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 Assessin....