TMI Blog2006 (3) TMI 232X X X X Extracts X X X X X X X X Extracts X X X X ..... oes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shown by the assessee and complete the assessment based on these book results. Thus we allow the appeal filed by the assessee. - HON'BLE D. MANMOHAN, JUDICIAL MEMBER AND J. SUDHAKAR REDDY, ACCOUNTANT MEMBER For the Appellant : Y. R. Rao For the Respondent : P. V. S. S. Prasad ORDER J. Sudhakar Reddy, Accountant Member. 1. This appeal filed by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-IV, Hyderabad dated 7-1-2005 for the assessment year 2001-02 on the following grounds: (1) Learned Asstt. Commissioner of Income-tax is erroneous in law and on the facts of the case in rejecting the book results under section 145 and estimating the profit at 12.5 per cent of gross receipts of the appellant. (2) Learned Assistant Commissioner of Income-tax ought to have accepted income returned by the appellant as there is no case to prove that accounts of the appellant are not correct and complete in a situation where appellant 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and may direct the Assessing Officer to accept the income returned. 2. Brief facts are as under. The assessee, a Public Limited Company, is engaged in the business of engineering and construction activities. It has clients in Government sector and public sector. The works undertaken by the assessee includes construction of bridges, airport runways, road laying, jungle clearance and electrification, construction of buildings etc. The assessee carried the works by itself and in few cases sub-contracted the works. The assessee filed its return of income declaring an income of Rs. 99.16 1akhs while the assessment was completed on a total income of Rs. 2.79 crores. In the course of assessment proceedings the Assessing Officer noticed that the accounts maintained by the assessee suffered from certain infirmities and, therefore, cannot be completely 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained are complete in the sense that there is no significant omission therein. If the answers to all the above four questions are in affirmative, then assessee's profits are to be computed on the basis of his accounts. In such case, neither the first proviso to section 145(1) nor section 145(2) can be invoked. If the finding on question Nos. 1, 3 and 4 are in affirmative, but finding in question No.2 is negative, first proviso to section 145(1) comes in and computation has to be made on such basis and in such manner as Assessing Officer, may determine. If the findings on question No.1, 3 or 4 is in negative, section 145(2) applies and Assessing Officer, may make a best judgment in manner provided for in section 144. It is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk and reward to a businessman. It is impossible to expect same ratio of profit in every civil work that is undertaken by us. It is quite possible that in some contract works, we may really loose out and still we have to bear with it in the overall interest of our business activity. (5) Site-wise Profit Loss Accounts will never form part of prescribed financial statements of the law as per Schedule VI of the Companies Act, 1956 or the prescribed books of account. MIS related information cannot be misinterpreted by the Assessing Officer to draft undue adverse inferences. On the other hand, the Assessing Officer while examining separate Profit Loss Account is expected to make comprehensive 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 consolida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, such items would be well within the acceptable limits of reasonableness. Anyhow, such items of expenditure would be well supported by our own vouchers duly authenticated by responsible work site managers. It may kindly be appreciated that such type of expenditure would be acceptable at the threshold on the basis of reasonableness. It is imperative to incur such expenditure and the same cannot be disputed by the Assessing Authorities. In such a scenario, test of reasonableness has been widely accepted in various judicial pronouncements for allow ability of such expenditure in the hands of assessee. 3.5 The learned Assessing Officer ignoring this 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 Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also established beyond doubt that Assessing Officer could not quantify any specific amount of expenditure for disallowance. Absence of some of the vouchers was projected as a reason for rejection of books. If at all there was any lapse on the part of the assessee in respect of maintaining vouchers of a particular item of expenditure, the same may warrant, at the most a specific addition and nothing beyond that. A minor irregularity cannot be blown out of proportion to resort a convenient approach of the rejection of the book results. In view of the same, he prayed the Hon'ble Bench to quash the reasoning offered by the Assessing 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks. On the observation of the Assessing Officer on Sub-contract Works in his assessment order that the assessee could not produce evidence against amounts debited as payment to subcontractors it was submitted that the system of sub-contracting is common, popular and frequently encountered in many civil construction cases. A main contractor, who is not in a position to render a particular work on his own either on account of financial hardship or on account of lack of labour and other manpower, may assign the same on sub-contract basis to another contractor. In such a scenario, the main contractor accepts only a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losing work-in-progress declared by the assessee-company at Rs. 5,49,777 is unreliable it was submitted that this inference was mainly drawn on the basis of bills raised to the tune of Rs. 1,45,39,926 in April, 2001 by the assessee. It was clearly explained by the assessee that turnover in the year under consideration was around 30 crores and in the year under consideration exact turnover was Rs. 32,03,64,188 which meant that the assessee had an average monthly turnover of more than Rs. 2.5 crores. On this size of activity, execution of a work and realizing proceeds from the contractee department to the tune of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that could be completed within a short period. The assessee furnished details of gross billing done during the previous three months are as under: January, 2001 Rs. 2.99 crores February, 2001 Rs. 3.63 crores March, 2001 Rs. 7.34 crores The above billing figures clearly show and support arguments that: (a) Billing amount around one to two crores per month is not unusual. And this huge billing indicates the company's capacity to complete the work within short span of time. (b) Closing work-in-progress as at 31-3-2001, is bound to be at a lesser figure, because the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tender costing as worked out by various contractee departments clearly mentioned that the profit ratio is at 10 per cent inclusive of overheads. The very contractee departments in almost all the cases have accepted the costing that the percentage of profit for the works allotted to us is at a gross ratio of 10 per cent inclusive of overheads and profits. The same was explained both to the Assessing Officer and the learned Commissioner of Income-tax (Appeals) and both have totally ignored the issue and have drawn adverse inferences, though the Assessing Officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs and miscellaneous receipts of Rs. 1.11 lakhs and after deducting the expenditure of the assessee the profit worked out to a mere Rs. 2.36 lakhs i.e. 2.5 per cent approximately. Similarly he submitted that in the case of Cochin Works, the profit worked out to Rs. 6.74 lakhs whereas the receipt was Rs. 52.38 lakhs. Similarly he took this Bench through page Nos. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the following orders of the Tribunal: (a) ITO, Ward-2, Nellore v. K.C. Reddy Associates [IT Appeal No. 1843 (Hyd.) of 1989 - order dated 29-8-1994] (Bench B). (b) ITO Ward-1, Nandyal v. Sri Srinivasa Constructions, Main Road, Kurnool [IT Appeal Nos. 804 and 805 (Hyd.) of 1993. - 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 Thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing results reflected in these M.I.S. reports were not reliable on the ground that the administrative overheads incurred at the Head Office were not debited to the concerned work site accounts. The Assessing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has demonstrated that the revenue has erred in rejecting its books of account and completing the assessment making huge additions. It also distinguished the case law relied upon by the revenue. We accept 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 Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment for more than 7 years. The revenue has scrutinized the accounts and the method of accounting regularly employed and adopted by the assessee year after year have not been found fault 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 prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monstrated, namely, a change in the fact situation or a material change in law whether enacted or declared by the Supreme Court. 5.8 In the case of a civil 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic defect has been pointed out or a specific addition made other than making general statements as to the authenticity of the vouchers. Simply stating 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, 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. 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by making submissions that there were stock 'transfers' internally between different work sites which lead 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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