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TMI Blog2012 (1) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in issuing direction in respect of points which were neither subject matter of show cause notice u/s 263 nor for which any explanation was sought from assessee before issuing such direction to AO 5. That on the facts and in the circumstances of the case, the order passed by ld. CIT -2, Jodhpur is nothing but an act to frame the assessment order like AO which he could not have passed directly under the law and therefore, crossed scope of revision u/s 263.' 2.2 The assessee is engaged in the business of contract work of roads. Before we consider the show cause notice issued u/s 263 of the Act., It will be useful to ascertain as to what transpired in assessment proceeding. (A) The AO has prepared a chart showing GP rate and NP rate of five assessment years including the assessment years under consideration (B) Assessee has maintained cash book and ledger and no stock register is maintained. (C) Assessee failed to give head wise break up of expense. Auditor has mentioned that there might be same personal expenses pertaining to partners (D) Assessee has not maintained log book, wages register, attendance register. (E) No complete expenses vouchers available in respect of lab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TDS certificate of subsequent year to see as to whether any work in progress was there at the end of year. (6) There are creditors in the balance sheet and the AO has not called for any confirmation. There may be outstanding wages. 2.4 The assessee filed reply vide letters dated 7.9.2009 and 21.9.2009. No books of account or vouchers were produced before the ld CIT. The point wise reply is summarized as under. (1) The ld CIT (A) has upheld the rejection of books of accounts and hence no disallowance u/s 40A(3) can be made. The ld CIT held that issue at point no. 1 is not pressed (2) Issue stated at point No.2 was not pressed by ld CIT as the order of AO has merged with order of CIT (A) (3) Before the ld CIT, the assessee filed extracts of cash book to show that amounts were deposited out of cash in hand. The ld CIT held that the AO should have considered as the assessee build up substantial cash in hand. On this issue the ld CIT was of the opinion that the order is erroneous. (4) In respect of point No.4, it was contended by assessee that order of AO has merged with order of ld CIT (A) and hence no addition can be made. 2.5 This issue and other points have been elaborately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made even after rejection of books of accounts and application of a particular GP/NP rate. Reverting back of the discussion, it is found that it normally takes 30 to 45 days for receipt of cheque after intimation of completion of work to the contractee. When a particular work is completed, the contractor gives a detailed bill to the PWD/ contractee for payment. On receipt of such bill, the PWD authority/ contractee goes to the site and measures the actual work done including that of quality. A report is thereafter sent and the bill is screened. The bill passes through several authorities before a cheque is finally issued. All these procedures take at least a month. Under such circumstances, in contractors' cases, the expenditures incurred in the last month normally becomes the closing work in progress. However, in the instant case, the AO failed to do any such exercise to determine the correct quantum of closing work in progress or closing stock of raw materials. The AO further failed to verify the return of the AY 2007- 08 to find out the TDS certificates issued in the month of April, 2006. The TDS certificates issued in April, 2006 would mean that such works were more or less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeded to complete the assessment. This shows the carelessness and negligent attitude of the AO. The question of making any inquiry or investigation did not arise for the reason that the preliminary details of various expenses remained to be furnished by the assessee. I believe that had the details been furnished by the assessee, the AO would have made at least some inquiries. During the course of such investigations/inquiries, the AO could have come across instances of bogus expenditures as also instances where expenditures were incurred out of books. Under such circumstance, the AO would have admittedly applied a higher NP rate as also made addition u/s 69A or 69B or 69C, as the case may be. The assessee was also duty bound to supply the relevant details of expenses as asked for by the AO. In any event, it is a fact that the assessment was completed without bringing such most important details on record and therefore, I have every reason to hold that the assessment was made in undue hurry, haste and without making any inquiries. The assessee failed to file copy of accounts of all transactions of more than ₹ 5 lacs though specifically asked for by the AO during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and pass a well reasoned fresh assessment order. He shall also investigate as to whether expenditures have been claimed under all heads which are normally required and incurred in the case of road construction or other contract works as entered into by the assessee. It is found that in few cases, some of the expenditures so incurred are not entered in the books on account of non-availability of bill or shortage of cash on hand etc. etc. whereas other expenditures are inflated so as to give a balancing approach. Needless to mention that the AO shall provide an opportunity of being heard to the assessee in the matter. 8. In respect of issue stated at para P-5 of this office show cause notice u/s 263 dated 06.03.2009, it is submitted by the assessee before me that the AO rejected the books of accounts and applied provisions of Section 145(3). The said rejection u/s 145(3) was upheld by the ld. CIT(A). Thus, the assessment order has merged into the appellate order and no disallowance/addition on account of closing stock or work in progress could be made now. I have given a careful consideration to the entire material facts and it is found that during the course of assessment proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s suggest that the contracts continued and therefore, the assessee had certain quantum of closing stock of materials/closing work in progress. The AO also failed to verify the purchases made and wages incurred in the month of March, 2006 to ascertain the closing stock of materials as also work in progress. All the above facts goes to prove that the assessment was made in undue hurry and without making any enquires. The point to be noted here is that there is apparent and substantial suppression of closing stock and had the AO substituted the correct figure of closing stock/work in progress, he would have ended up with a much more addition than the addition made by him after rejecting the books of accounts and applying a particular NP rate. I have already discussed earlier that closing stock is an integral part of accounts and any deviation therein changes the profit. In other words, if an addition is made by rejecting the books, yet the AO is required to and legally bound to substitute the figure of closing stock etc. as disclosed by the assessee with the correct figure. The above discussion amply shows that the assessment order so passed by the AO is erroneous as also prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uced resulting into application of provisions of Section 145 and making some addition to the trading results by looking into past records or comparable cases. Whether under such circumstances, no addition could be made on account of such huge cash credits introduced in the books with ulterior motive? If the contention of the assessee is accepted, every assessee would indulge in this practice and it would be a very easy way of introducing the concealed income in the guise of cash credits. Besides that, addition on the basis of GP/NP rate after rejecting the books represents "income from business" whereas addition on account of cash credits represents "deemed income" and therefore, the two are entirely different without any overlapping. In this regard, it would be useful to refer to the decision of the Hon'ble Supreme Court in the case of Kale Khan Mohd. Hanif Vs. CIT reported in 50 ITR 1, wherein it has been observed that cash credit can be assessed even when business income is estimated. This view was again reiterated by the Apex Court in the case of CIT Vs. Devi prasad Vishvanath Prasad (72 ITR 194). Besides that, decisions reported in 38 ITR 188, 120 ITR 294, 28 ITR 713 and 40 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 12.5% on contract receipts of ₹ 14,01,79,045/-. It implies that the AO rejected the books in respect of all items of expenditure relating to trading account but accepted as correct all items of expenditure debited to P&L account. It is not understood as to how the AO adopted the above standards. It is incorrect as also unjustified to treat some of the expenditures debited in the books as correct and some as incorrect/unreliable. The books of accounts cannot be rejected in part. Once books are rejected, it means that the entire books are not reliable in so far as business income is concerned. Therefore, the AO admittedly erred as discussed above and the assessment is to be treated as erroneous as also prejudicial to the interest of revenue. 13. Perusal of the details of sundry creditors shows some of the amounts as below: Shiv Shakti Roadlines Rs.2,65,796/ Ritu Roadlines Rs.1,27,673/ Bherav Const. Co. ₹ 4,49,868/ Khatri Maga Ram Bhoorchand Rs.2,35,000/ Hasti Mal Mohan Lal Rs.23,78,638/ Puroshtam Das Jagdish Chand Rs.2,21,000/ Bhanwar Lal Mufat Lal Rs.6,75,239/ The AO failed to even ask for any question as to what for the above liabilities are reflected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and invoked the provisions of section 145(3) of the Act and computed the income by applying gross profit rate of 12.5% on the contract receipts and made an addition of ₹ 4,06,540/ b] Interest received on FDRs & KVP treated as income from other sources amounting to ₹ 3,00,681/- c] Disallowances of interest amounting to ₹ 1,40,762/- as the has not charged interest from debtors. d] Lump sum addition of ₹ 1,50,000/- 5. As the addition made by AO were contrary to the well settled law the appellant firm preferred an appeal before CIT(A) Jodhpur on 16-04-2008. 6. That appeal filed by the appellant firm was heard by the then CIT(A) Jodhpur from time to time. The additions made by AO was eligible for deletion in light of decisions of CIT(A) and Hon'ble Tribunal in other cases on similar facts, yet the ld CIT(A) rather deleting the additions issued a show cause notice u/s 251(1)(a) of I.T. Act 1961 for enhancing the income on the issue of deduction allowed by AO in respect of sub-let commission paid to main contractor which was allowed by AO as a separate deduction while computing taxable income in light of decisions taken in earlier years in the appellant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jasthan High Court is reported in 257 ITR 753 (Raj). 15. That the assessee's appeal against the order of AAC enhancing the income by disallowing the claim of depreciation, interest paid to third parties and interest and salary paid to partners was also allowed by the Hon'ble Tribunal by reversing the order of ld CIT. 16. That department also filed reference application against the order of Hon'ble Tribunal which was also dismissed. The judgment of Hon'ble Rajasthan High Court is reported in 245 ITR 527 (Raj). 17. That after the decision of Hon'ble Rajasthan High Court the ld AO while passing the assessment order for the assessment year 1994-95 to 2008-09 allowed the following claims even in the orders passed u/s 143(3). (a) Depreciation. (b) Interest paid to third parties. (c) Subletting Commission (d) Interest paid to partners as per terms of partnership deed. (e) Salary paid to partners as per the terms of partnership deed. 18. That after the assessment year 1994-95 the ld CIT (A) for the first time in the assessment year 2006-07 in the order u/s 263 directed the AO to disallow the claim of interest paid to third parties. This direction was issued without raising the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of closing stock [P 5] (vi) Relating to failure of AO to obtain confirmation of a/c from the parties in whose names amounts are shown as out standing and application of provisions of sec 40(a)(1a). (b) That reasons recorded in the show cause notice at S. No. 1, 2, 4, 5 and 6 are related to the computation of income from contract business. In the appellant case the AO rejected the books of accounts and applied the provisions of sec 145(3). The rejection of books of accounts was up held by CIT(A) in his order dated 18-08-2009 in Appeal No. 9/2008-09. The ld CIT(A) also up held the trading addition and application of profit rate adopted by AO. In such a situation when the books of accounts are rejected and income was estimated by AO after applying nett profit rate and income so determined is confirmed by CIT(A) the issues covered by Para No. 1, 2, 4, 5 and 6 of show cause notice which relates to contract account will not survive while exercising powers u/s 263 as all the issues raised relates to computation of income from contract business and are merged in the order of CIT(A). Not only this when the books of accounts are rejected and income is computed by application of nett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opies of cash book and the details of cash deposited in bank accounts which are out of cash in hand and was mostly on account of withdrawals from one a/c and deposit in other account. c] The perusal of the order passed u/s 263 shows that the order has been set aside merely on the ground of allegation of lack of enquiry. There is no definite finding about the errors or prejudiced caused to the Revenue. Further it appears from the body of the order that the ld CIT simply wants detailed enquiries and investigation of the case as per his own wisdom. d] That the ld CIT in his order has not disputed the rejection of books of accounts and the application of net profit rate as applied by the ld AO. In the case of the assessee the consistent mode of computation of income from contract business is the application of net profit rate on the gross contract receipts after exclusion of amount deducted by Government Authorities from the gross contract receipt and from the profit so derived is further subject to deduction on account of depreciation, interest and salary paid to partners as per terms of partnership deed and the interest paid to the third parties. This system of computation of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be supported by reasons for its conclusion. Necessary consequence is that while passing the order revising an order passed by subordinate officer of the rank of ITO or Asstt. CIT, the CIT must record reasons in support of his conclusion that the order is revised being erroneous and that it would be prejudicial to interests of Revenue due to such erroneousness. 9. If the order is tested on aforesaid anvil, it is apparent that the CIT has recorded his satisfaction before issuance of notice to the assessee, that having believed that the order is erroneous and prejudicial to interest of the Revenue, he issued to assessee notice for giving an opportunity of hearing but the order is unequivocally silent after notice was given to the assessee and he was heard, to record any finding as a result of such hearing whether order of the ITO holding the firm to be genuine is erroneous in any manner or it is prejudicial to the interests of the Revenue. When no finding has been recorded, it is very difficult to assume that CIT must have arrived at finding as to erroneous nature of the order sought to be revised, or if such order is allowed to stand would be prejudicial to interests of the Revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e power of revision under this section. Any order of the Assessing Officer cannot be termed as erroneous unless it is not in accordance with law. It necessarily implies that if the order passed by the Assessing Officer is in accordance with law applicable thereto, the same cannot be branded as erroneous. On perusal of the records the CIT may be of the opinion that the estimate by the officer concerned is on the lower side and left to the Commissioner to estimate the income at higher figure than determined by the ITO. That would not vest the Commissioner with power to reexamine the accounts and determine the income himself at higher figure. This is because the ITO is exercising the quasi judicial power rested with him in accordance with law and arriving at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion reached by the ITO. In such a case in the opinion of the Commissioner the order is prejudicial to the interest of revenue but that by itself would not be enough to vest the Commissioner with the power of suo-motto revision because the first requirement namely that the order is erroneous, is absent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a/c from the creditors which are shown as out standing and application of provisions of sec 40(a)(1a). a] As regards issues which are related to expenditure which are part of contract account and for which AO rejected the books of accounts and applied provisions of section 145(3) which stood confirmed by CIT(A) and as such out side the scope of sec. 263. S.No. Reasons in show cause notices 1. Relating to non-filing of details of expenditure incurred by the assessee and non-furnishing of copy of a/c of transaction with parties above ₹ 5 Lac. 2. Relating to non examination of issue of closing stock. 3. Relating to failure of AO to obtain confirmation of a/c from the parties in whose names amounts are shown as out standing and application of provisions of sec. 40(a)(1a). 4. Relating to failure of AO to obtain confirmation of a/c from the creditors which are shown as out standing and application of provisions of sec 40(a)(1a). (i) The issue raised by the ld CIT in respect of application of provision of section 40(a)(ia) is not correct as (1) The appellant maintained day to day books of accounts & vouchers. The appellant appointed various persons at site where the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5(3) & estimated income by application of profit rate than the same books cannot be considered for making specific disallowances. Reliance is placed on: - (1) J. K. Construction Co. v/s ITO reported in 100 TTJ 1101 (ITAT, Jodhpur) (P.B. Page 71-75) [P.B. 71 to 75] "Revision - Erroneous and prejudicial order - Lack of proper enquiry - Objections of CIT on the points of GP rate, provision of ₹ 16,57,350 made in the books and non-application of s. 40A(3)-Not justified in the facts and circumstances of the case- As regards GP rate, assessee had returned 3.8 per cent as compared to 3 percent accepted by Department in immediately preceeding year - CIT was not therefore, justified in applying GP rate of 5 percent - As regards provision of ₹ 16,57,350/- it basically represented expenses claimed in the trading account and only a small portion related to expenses of P&L a/c - Further, after applying GP rate, it was not open to the AO to consider the expenses separately and therefore no separate addition under s. 40A(3) can be made." (2) Amritlal Khatri v/s DCIT, Barmer ITA No. 233/Ju/2009 dated 19-07-2010 (Jodhpur)(P.B. Page 60 - 70) [P.B. 60 to 70] In this case whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the entire addition of ₹ 26,20,509/-. The ground of appeal of the assessee is accordingly accepted and the ground of the Revenue's appeal is dismissed." (4) Income Tax Officer, v/s M/s Midha Construction, Hanumangarh Town ITA No. 291/JDPR/2007 (P.B.Page 80-82) In this case the Hon'ble Tribunal held at Page No. 3 as under: - "After rejection of books, this Bench has been, preferably, adopting the rate of immediately preceding assessment year, as the best guide for estimation of the net profit. From the above chart, it is manifest that in the immediately preceding assessment year the net profit rate was 6.30%, but in this year it is 6.08%. To determine the income of the assessee the net profit rate of the past year has to be applied to the declared receipts. Therefore, we direct the Assessing Officer to adopt the net profit rate of 6.30% and apply it to the total receipts of ₹ 1,95,89,154/- and the figure of W.I.P. shall not be considered for this purpose. In view of our above finding the solitary ground raised by the revenue stands dismissed." The following decisions also support to claim of assessee: - (1) CIT v/s Girdharilal, 258 ITR 331. (2) CIT v/s Honda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case for the assessment year 1993-94 and in light of decision of Hon'ble Rajasthan High Court in the case of CIT v/s Bhavan Va Path Nirman (Bohra) & Company reported in 258 ITR 431. SLP against this order stood rejected in 264 ITR (ST) 36. The ld CIT cannot travel beyond the show cause notice. 317 ITR 249 (Del) Relating to non examinationof interest income from NSE of ₹ 4,50,000/- shown in balance sheet. (i) The interest paid to creditors is to be reduced after estimating the profit by application of particular rate of profit was decided in the case of assessee by Hon'ble Rajasthan High Court reported in 257 ITR 753 and the same was allowed right from assessment year 1993-94 to 2007-08 by AO and was not objected in all the years in which appeals were filed. (ii) That in the show cause notice the ld CIT has no where objected to the deductibility of interest paid to third parties and interest on NSC shown in balance sheet. When a issues which were not subject matter of notice u/s 263 cannot form a basis while passing the order u/s 263 as held by Hon'ble Delhi High Court in the case of CIT v/s Contimeters Electricals P. Ltd. reported in 317 ITR 249 following the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able for penalty u/s 271(1)(c) for concealment and for furnishing inaccurate particulars of its income." (2) That the assessment order passed by AO shows that he considered the issue and made addition which to was confirmed by CIT (A) the ld CIT erred in branding the order as erroneous and prejudicial to the interest of Revenue. In light of above the order passed by ld CIT u/s 263 may kindly be quashed. '' 2.7 The ld. AR relied upon the details filed before the AO which is available at pages 32 and 38 of the paper book. Such details were also filed before the ld. CIT during the course of proceedings u/s 263 of the Act. The ld. AR drew our attention to pages 16 to 30 of the paper book. The ld. AR drew our attention to page 34 of the paper book. The assessee vide reply dated 18-02-208 stated that the assessee has fully complied with the provision of Section 269SS and 269T of the. 2.8 Before the ld. CIT, the assessee filed the extract from the cash book to explain the deposits in the bank account in cash. S.No. Grounds taken in order but not part of show cause notice u/s 263 Submission/Evidences 1 The ld CIT in show cause notice nowhere objected the interest paid to third par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld AO made additions of ₹ 3,00,681/- on account of interest received from bank, NSC & FDR as per finding recorded in Para 3 at page No. 4 & 5 which reads as under: - "From the details of interest it is revealed that the assessee has claimed interest payment of ₹ 35,83,211/- @ 15% to 18%. Out of the above ₹ 12,33,232/- have been paid to Banks and Finance companies and the remaining amount of ₹ 23,49,980/- have been paid to the HUF of the partners and the other family members (persons specified u/s 40A(2)b) and the relatives. This payment of interest is besides the interest payment allowable to the partners. Further the assessee has claimed to receive interest of ₹ 3,00,681/-, which includes the interest on refund of ₹ 49,440/- received in this year. If the interest of refund is excluded, the receipt of interest remains at ₹ 2,51,241/- only and the same is from the interest of FDRs with the Banks. It is to be seen that the interest income received from Bank/NSC/FDR/IT Department does not represent contract business income and, therefore, requires to be separately taxed. This view gets support from the decision reported in the cases of M.K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. 4. T. Sheraffudin Vs. CIT, 41 DTR 286 (Ker.) - the Hon'ble Kerala High Court held that the AO accepting the cash credits without conducting examination as to genuineness thereof showed that the AO has not made proper enquiry and the order was held as erroneous and prejudicial to the interest of the revenue 5. D.C. Auddy & Bros Vs. CIT, 28 ITR 713 (Cal.) - Hon'ble High Court held that the addition of cash credit can also be made even if income from business is estimated. 6. CIT Vs. Maduri Rajaiahgari Kistaiah, 120 ITR 294 (A.P.) - In this case, the Hon'ble Andra Pradesh High Court held that addition on account of cash credit can be made even if income from business is estimated. 2.11 We have heard both the parties. The ld. CIT issued the show cause notice in which he raised six points. The ld. CIT has not considered the point no. 1 and 2 as necessary for the purpose of invoking the provision of Section 263 of the Act. Hence the issue on point no. 1 and 2 are not required to be considered for deciding the issue as to whether the action of the ld CIT in invoking the provision of Section 263 is correct. Moreover, we also agree with the contentions of the ld. AR that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order as erroneous and prejudicial to the interest of the revenue have already been considered by the AO. There is difference between the lack of enquiry and insufficient enquiry. An enquiry may be sufficient for one authority while the same may be insufficient for other authority. Sufficiency of the enquiry is a subjective decision. If the AO made enquiry and considered all the aspects then there was no case of holding the order as erroneous and prejudicial to the interest of the revenue. 2.16 The 5th issue taken by the ld. CIT is that the AO has accepted the statement without verification. There may be closing stock. The AO should have verified the closing stock. The assessee is accounting the purchases as consumption. The assessee is following the same consistent principles of accounting. In case the AO wants to change the method of stock then he has to give opening stock also. In case the method of valuation is changed by the assessee then there is no need of making adjustment in the opening stock. Once the assessee is following the consistent method of accounting and if the AO has accepted such consistent method then order of the AO cannot be considered as erroneous. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with law applicable thereto, the same cannot be branded as erroneous. On perusal of the records, the CIT may be of the opinion that the estimate by the officer concerned is on the lower side and left to the Commissioner to estimate the income at higher figure than determined by the ITO. That would not vest the Commissioner with power to re-examine the accounts and determined the income himself at higher figure. This is because the ITO is exercising the quasi judicial power rested with him in accordance with law and arriving at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion reached by the ITO. In such a case in the opinion of the Commissioner the order is prejudicial to the interest of the revenue but that by itself would not be enough to vest the Commissioner with the power of suo-motto revision because the first requirement namely that the order is erroneous, is absent. Similarly if the order is erroneous but not prejudicial to the interest of revenue, then the power of the suo-motto revision cannot be exercised. Therefore, the twin ingredients of 1) order being erroneous and 2) prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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