TMI Blog1999 (5) TMI 459X X X X Extracts X X X X X X X X Extracts X X X X ..... e seized as they gave details of on money, receipts amounting to Rs. 1,04,44,834. 3.The assessee submitted that the same was offered for taxation for the assessment year 1991-92 in addition to the regular income. 4.In the second search, in response to question No. 15, the director of assessee company submitted that company had received total amount of Rs. 1,05,01,345 from prospective flat owners as on 30th Nov., 1992. 5.It was found, that the total gross money receipts which were received relevant to assessment years 1990-91, 1991-92, 1992-93 and 1993-94 totalled Rs. 2,09,46,179. Out of this, Rs. 1,46,97,614 was added to income of 1991-92. For 1992-93, the same money amounted to Rs. 35,85,595. The explanation of the assessee was that this sum of Rs. 35,57,500 has been declared twice in the gross receipts and is included in Rs. 1,04,44,834 of first search and also in Rs. 1,05,01,345 of second search. 6.The contention of the assessee was that the total gross money received would be Rs. 17,38,88,679 only. It was discussed the same amount should be spread over the relevant previous years in which they were received. Rs. 1,46,97,614 was taxed in 1991-92. In 1992-93, Rs. 26,91,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt already taxed in 1990-91 and 1991-92. When the matter was taken to the CIT(A), all the pleas that was raised before the Assessing Officer were raised before him as well. The CIT(A) held that books of account of assessee were not reliable and there is material on record to prove that most of the on money was received outside the books of account. He, therefore, upheld the action of the Assessing Officer in estimating the rate of 12 per cent to the gross turnover. He, further, proceeded to hold that the Assessing Officer should allow deduction of 12 per cent out of cash receipts i.e. , to say on money receipts and gave the assessee necessary relief. The Assessing Officer while giving effect to the direction of the CIT(A) applied the rate of 12 per cent for taxation purposes in spite of carrying out the directions of the CIT "To allow deduction of 12 per cent out of cash receipts i.e. , on money receipts". The Assessing Officer applied a rate of 12 per cent only on the on money . However, the Department in this appeal has challenged this order of the CIT(A). We have heard the parties in detail. The CIT(A) after going through the various arguments raised before him and befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding application rate of 12 per cent in the earlier years by the CIT(A), it was submitted that in the earlier years, the Pune project was not completed and therefore, the assessment was made on higher rate. In 1992-93, Pune project has been completed and the chartered accountants have not made any adverse remarks on the books of account maintained by the assessee company. Similarly, no challenge has been made on the allotment of certain flats to the certain Government nominees at much lower rates. It was, therefore, submitted that there is no justification of applying the rate of 12 per cent to the entire turnover. It was also submitted that applying the provisions of section 40A(3) to the expenses incurred out of cash business receipts cannot apply in view of the decision Sham Dass Inder Raj v. ITO [1988] 27 ITD 314 (Delhi). Our attention was invited to the decision in CIT v. S.C. Kothari [1974] CTR 137/[1971] 82 ITR 794 (SC) to submitting that the incidental expenses even of illegal business is to be deducted while taxing profit from illegal activity. It was also submitted in view of the several decisions, including decision Shapoorji Pallonji Co. (P.) Ltd. v. IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cash receipts of on money for this year is Rs. 35,00,000 approximately. We are, therefore, of the opinion that on this turnover, a rate of 12 per cent should be applied following the order of the Tribunal for assessment year 1991-92. As far as the balance of the turnover is concerned, the rate as shown 12 per cent by the assessee should be accepted. 8. Regarding the charging of interest under section 234B, we are of the opinion that it has consequential effect and necessarily relief may be allowed to the assessee. 9. In the result, appeal of the assessee is allowed in part. G.C. Gupta, Judicial Member - These cross-appeals by the Revenue and the assessee for the assessment year 1992-93 are directed against the order of the CIT(A). I have the benefit of the order passed by my learned brother but I could not persuade myself to agree with the same and accordingly a separate order is being passed. Since the cross-appeals relate to the same assessee and same assessment year, these are being disposed of by a common order. ITA No. 9595/Mum./95 2. This appeal has been preferred by the Revenue. The only ground of the Revenue is that : "On the facts and in the circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out of such business receipts and in view of the fact that during search operations no cash was found, the cash expenses should have been allowed. Referring to the application of provisions of section 40A(3) to expenses incurred out of cash business receipts, reliance is placed on decision of Hon ble Supreme Court in the case of CIT v. S.C. Kothari [1974] CTR 137/[1971] 82 ITR 794 (SC) wherein incidental expenses have been of illegal business is to be deducted while taxing a profit from illegal activities. The learned counsel relied upon the decision of Tribunal Mumbai Bench in Pranav Construction Co. v. Asstt. CIT [1998] 61 TTJ (Mum.) 145/[1998] 96 Taxman 323 (Mag.). CIT(A) held that although his view in the matter for the impugned assessment order is identical with that of earlier assessment year. But in view of the decision of the Hon ble Tribunal in ITA No. 1759/Bom./1995 dated 7th Aug., 1995, in the assessee s own case wherein held that the entire amount of on money received by the assessee could not be taxed in its hand and they have directed the Assessing Officer to take only 12 per cent of gross receipts as income of the assessee out of on money and accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1991-92. Without prejudice that no income be taxed in assessment year 1992-93 as the project to which such receipt relate has not been completed during assessment year 1992-93 following the project completion method consistently followed by your appellant. (4) The CIT(A) XXV, Bombay, erred in facts and in law in rejecting the contention of your appellant to the effect that interest under section 234B of Income-tax Act, 1961, if at all leviable, be restricted upto the date of passing an intimation under section 143(1)( a ) of the said Act. Your appellant therefore prays : ( i )The method of accounting viz ., project completion method followed consistently and regularly and accepted by the Department be accepted. ( ii )That actual profits of Rs. 35,89,659 derived as per books on the basis of project completion method be taxed instead of estimated profits of Rs. 70,40,106 made by the Assessing Officer and upheld by CIT(A) XXV, Bombay. ( iii )That only 12 per cent of gross cash receipts i.e. , on money of Rs. 35,89,659 be taxed as income following Tribunal order in your appellant s own case in ITA No. 1759/Bom./1995 dated 7th Aug., 1995, for assessment year 1991 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses on profits, cash in hand and tax provision by the assessee company in respect of disclosures made by it. During the course of search, the computer sheet was seized and the on money received by the assessee is proved on record and accordingly the account books maintained by the assessee cannot be relied upon and a rate of 12 per cent on the gross receipts was applied by the Assessing Officer. For adopting the rate of 12 per cent on the gross receipts, the Assessing Officer observed that during the assessment for the assessment years 1990-91 and 1991-92 profits were taken at the rate of 12 per cent of the gross receipts and the same has been confirmed in appeal by the learned CIT(A) vide order dated 5th Dec., 1994. The assessee s appeal with CIT(A) remained unsuccessful and that no ground against it was taken in appeal to the Tribunal. 6. Before us, the learned counsel for the assessee argued that the facts of the earlier assessment year are not comparable with that of the relevant year for the following reasons : ( 1 )That this is the year when the projects launched by the assessee were completed and in the earlier years the projects were in progress. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir inability to make any comments on the profits earned by the assessee for the simple reason that they are not satisfied with the correctness of the account books of assessee. The on money was detected at the time of search and the assessee has admitted the fact of on money receipts from the buyers of the flats. The assessee has also admitted that the expenses have been made outside the books of account. The learned Departmental Representative argued that the rate of 12 per cent was applied in earlier assessment years 1990-91 and 1991-92 which has been confirmed in appeal by the CIT(A) and no ground against the application of 12 per cent rate of profit was taken in appeal before the Tribunal. 9. I have given careful thoughts to the rival submissions. In my considered view, the account books of the assessee are liable to be rejected for the following reasons : ( I )As a result of two search operations under section 132 of the Income-tax Act, 1961 on 21st Aug., 1990, and on 24th Dec., 1992, a computer sheet was found, which gave details of on money receipts and the assessee himself offered the same for taxation for the assessment year 1991-92 in addition to the regular i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee with regard to the facts of the case of the assessee for the year under appeal with that of the facts of the earlier assessment years, wherein a rate of 12 per cent of profit was applied and upheld by rejecting the books of account, is also not sustainable. The assessee is following the project completion method and there is no dispute regarding the same. The auditors of the assessee company have expressed their inability to make any comments on the profits earned by the assessee, which shows that they were not convinced about the correctness of the accounts maintained by the assessee or about reasonability of the profits disclosed by the assessee company. The total area of Government control flats at Pune at fixed rate was 16,800 sq. ft. only where the total area of completed project was 2,12,536 sq. ft. which cannot affect the profitability of the entire project of the assessee. The assessee was in appeal before the Tribunal for the earlier assessment year 1991-92 and the assessee choose not to agitate the issue of application of profit rate of 12 per cent before them. The only issue which they had agitated before Tribunal was regarding claim of expenses against es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unted and unaccounted turnover of the assessee." 2. The assessee is engaged in construction. In respect of the assessment year 1992-93, for the previous year ended on 31st March, 1992, the assessee had declared profits in respect of transactions recorded in the books of account at Rs. 37,48,843. The Assessing Officer noted that there were two searches in the assessee s case under section 132(1) of the Act on 21st Aug., 1990, and 24th Dec., 1992, that in the course of the search the director of the assessee company had stated that the assessee had received a total amount of Rs. 1,05,01,345 from prospective purchasers as on 30th Nov., 1992, and that in the course of the first search a computer sheet showing on money receipts of Rs. 1,04,44,834 was found. He further found that the total on money receipt during the relevant previous year amounted to Rs. 35,85,595. He proposed to add the on money receipts as the income of the assessee. The assessee objected by saying that the amount has already been included in the on money receipt unearthed during the two searches. Nothing that the on money receipts of Rs. 35,85,595 has been received from different persons and not the same persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were not recorded in the books of account and adopt 12 per cent of the on money as the assessee s income. As regards the recorded transactions, the CIT(A) rejected the assessee s contention and upheld the action of the Assessing Officer in estimating the profits at Rs. 70,40,106 @ 12 per cent on the gross turnover as against the actual profits of Rs. 37,48,843 declared by the assessee @ 6.72 per cent on the gross turnover. In other words, so far as the recorded transactions are concerned, the action of the Assessing Officer was upheld. 5. Both the Revenue and the assessee filed appeals before the Tribunal. So far as the appeal by the Revenue is concerned, both the Members of the Tribunal were agreed that the CIT(A) was justified in directing the Assessing Officer to allow expenses against the on money receipts and in directing the Assessing Officer to tax only 12 per cent of the money receipt as income. There is no difference of opinion so far as unrecorded transactions are concerned. 6. However, as regards the recorded transactions, the learned AM accepted the assessee s contention that in respect of the recorded transactions the book results have to be accepted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessment itself has not been made under section 144 of the Act but has been made admittedly under section 143(3) and further that at any rate the Assessing Officer has not commented on the correctness of the recorded transactions, nor have the auditors made any adverse comments in respect of such transactions. Mr. Trivedi also submitted that all the eight reasons given by the JM in para 9 of his order in support of his conclusion that the IT authorities were justified in rejecting the book results in respect of the recorded transactions and in resorting to an estimate of the profits even in respect of such transactions, were irrelevant and had no bearing on the recorded transactions of the assessee. He further submitted that if even the profits in respect of recorded transactions are to be estimated and the book results are not to be accepted, there is no purpose in maintaining accounts. In this connection he contended that the stigma attached to the assessee for indulging in unrecorded transactions should not be permitted to affect that attitude towards even the recorded transactions. 9. In support of his contentions, Mr. Trivedi drew my attention to the paragraph ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i submitted that if the Assessing Officer had in mind the provisions of sub-section (2) of section 145, he would have also invoked the provisions of section 144 specifically and not having done that, the argument of the learned Departmental Representative that the book results were rejected only by invoking section 145(2) cannot be accepted. He contended that the Assessing Officer should have made a composite assessment by applying a percentage on the aggregate of the unrecorded and recorded receipts but not having done so and having himself segregated the unrecorded transactions from the recorded transactions, it was not open to him to reject the results disclosed in the books in respect of the recorded transactions. My attention in this connection was drawn to p. 3457 of Chaturvedi and Pithisaria s book, Vol. 3, Fourth Edition. Mr. Trivedi finally pointed out that the Assessing Officer had not given any show-cause notice as to why the assessment cannot be made in the manner provided under section 144 as postulated by section 145(2) and this vitiated the assessment. 12. I have carefully considered each one of the rival contentions advanced before me. The short question which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and expenses on the profits, cash in hand and tax provision. according to the Assessing Officer the effect of this is that the profits disclosed by the company are not reasonable. After so observing, in para 6 of the assessment order he has rejected the books of account under section 145 of the Act. He has not mentioned the specific sub-section under which he has rejected the books of account. However, reading the entire para 6 as a whole, it is clear that he has rejected the books only under sub-section (2) of section 145. This is strengthened by the fact that in para 6 itself the Assessing Officer has referred to the unaccounted receipts and expenses recorded in a separate set of accounts which were found in the course of the search. Therefore, in my opinion, the Assessing Officer has rejected the books only under sub-section (2) of section 145 and that too only because of the fact that a part of the receipts and expenses were kept separately without being disclosed to the IT authorities. In my view the fact that the rate of profit declared by the assessee was much less at 6.72 per cent as compared to 10 per cent as per the director s statement and 12 per cent as per the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Senior Departmental Representative to the effect that if a part of the transactions are kept away from the knowledge of the IT authorities, the books of account lose their sanctity and that the omission of a part of the transactions is itself a serious defect, justifying the Assessing Officer s conclusion that the accounts are not correct or complete. The resort to section 145(2) in that case would be fully justified. I also do not see merit in the contention of the assessee that so far as the disclosed portion of the business is concerned, the Assessing Officer has no power to reject the same by invoking section 145 of the Act. The contention, if accepted, would enter the provision of section 145(2) otiose . In every case where a part of the transactions is kept away from the knowledge of the IT authorities, it would not be open to the assessee to say that the part of the transactions which have been disclosed to the Department are correct and complete and, therefore, they should be accepted. Such a contention would obviously render the provisions of section 145(2) unworkable. By completeness of accounts, what is meant is that no part of the transac- tions relating to the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-contractors. The assessee had maintained accounts properly in accordance with Mineral Concession Rules and were checked by Governmental authorities. Annual and monthly returns were submitted in accordance with the coal mine regulations. The coal produced was despatched by rail which was a check against manipulation of accounts. The payment was made to the sub-contractor at a certain rate per ton of coal. The High Court held that on these facts the Tribunal s finding that the account books could be rejected was vitiated because it failed to consider certain relevant facts and circumstances indicated above. This is not the position in the case before me. Here admittedly a part of the transactions relating to the assessee s constru-ction business has been kept outside the knowledge of the IT authorities and did not find a place in the books of account produced before them. This decision is, therefore, not applicable. 18. The judgment of the Gauhati High Court in the case of Aluminium Industries (P.) Ltd. ( supra ) it also distinguishable because in that case the Tribunal upheld the resort to section 145(2) on the only ground that the gross profit was low, without giving any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all for rejection of books. In the present case though the Assessing Officer has referred to the gross profit rate being low, the major reason for rejecting the books under section 145(2) is the omission of some receipts from the regular books of account produced before the Assessing Officer. Therefore, this order is not of much assistance to the assessee. 23. In [1995] 52 TTJ (Jp) 102 no defects had been found by the Assessing Officer in the account books and it was held that mere low rate of gross profit cannot justify the wholesale rejection of the books. As would be evident, this order is also not helpful to the assessee in the present case. 24. In Prahladdas Hari Kishan v. Asstt. CIT [1998] 60 TTJ (Ind.) 27, another order of the Indore Bench of the Tribunal cited before me the facts are similar to the facts in [1995] 51 TTJ (Jp) 698 ( supra ), and therefore, the order does not assist the assessee s case. 25. Thus none of the judgments or orders cited on behalf of the assessee advances its case. 26. In the course of the arguments before me, the learned counsel for the assessee submitted that even if it is assumed that the Assessing Officer had resorted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itten by the assessee to the Assessing Officer. The contention was that since the profit rate was reasonable, the books cannot be rejected. As against this, the learned Senior Departmental Representative had submitted that the profit rate of 12 per cent is very reasonable since in the assessment year 1991-92 the same percentage was accepted by the assessee as reasonable. In reply, the learned counsel for the assessee had submitted that in view of the method followed by the assessee, the acceptance of 12 per cent in the earlier year even in respect of recorded transactions was not very relevant. 29. I have pondered over the question as to whether it is within my jurisdiction to examine whether the percentage adopted by the IT authorities is fair and reasonable. After considering the matter, I have reached the conclusion that I have no jurisdiction to do so. The question proposed leaves only two options to IPS. The first is to hold that the book results shown by the assessee in the accounted business should be accepted. I have not exercised, this option, I have held that the book results cannot be accepted. The only other option left to me, by the question formulating the differe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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