TMI Blog2003 (2) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... 992 respectively. 2. In the first search, a computer sheet was found, whose pages 131 and 147 were seized as they gave details of 'on money' receipts amounting to ₹ 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 ₹ 1,05,01,345 from prospective flat owners as on 30th November 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 ₹ 2,09,46,179. Out of this, 1,46,97,614 was added to income of 1991-92. For 1992-93, the same money amounted to ₹ 35,85,595. The explanation of the assessee was that this sum of ₹ 35,57,500 has been declared twice in the gross receipts and is included in ₹ 1,04,44,834 of first search and also in ₹ 1,05,01,345 of second search. 6. The contention of the assessee was that the total gross money received would be ₹ 17,38,88,679 only. It was discussed the same a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of 12% on the gross receipts of ₹ 5,86,67,554. This gross profit was thus worked out at 70,40,106, after giving credit for amount already taxed in 1990-91 and 1991-92. When the matter was taken to the CIT(A), all the pleas that were 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 A.O. in estimating the rate of 12% to the gross turnover. He, further, proceeded to hold that the A.O. should allow deduction of 12% out of cash receipts i.e. to say 'on money' receipts and gave the assessee necessary relief. The A.O. while giving effect to the direction of the CIT(A) applied the rate of 12% for taxation purposes in spite of carrying out the directions of the CIT To allow deduction of 12% out of cash receipts le. 'on money' receipts . The A.O. applied a rate of 12% 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 CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding application rate of 12% 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 Co. 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% 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 in Sham Dass Inder Raj vsITO[l988] 27ITD 314 (Delhi). Our attention was invited to the decision in CITv. S.C. Kothari [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 in ShapoorjiPallonjiandCo.. (Rajkot) (P.) Ltd. vs ITO [1994] 49 ITD 479 (Bom.); the proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rox. We are, therefore, of the opinion that on this turnover, a rate of 12% should be applied following the order of the ITAT for assessment year 1991-92. As far as the balance of the turnover is concerned, the rate as shown 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. Per 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 pursuade 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 circumstances of the case and in law the learned CIT(A) erred in directing to allow expenses a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch operations no cash was found, the cash expenses should have been allowed. Referring to the application of provisions of 40A(3) to expenses incurred out of cash business receipts, reliance is placed on decision of Hon'ble Supreme Court in the case of S.C. Kothari's (supra) 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 ITAT Mumbai Bench in Pranav Construction Co.vs Asstt CIT[ 1998] 96 Taxman 323, 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 ITAT in ITA No. 1759/Bom./95 dated 7-8-1995 in the assessee's own case where in held that the entire amount of 'On money' received by the assessee could not be taxed in its hand and they have directed the AO to take only 12% of gross receipts as income of the assessee out of 'On money' and accordingly in view of the decision of the ITAT (supra), the CIT(A) allowed the contention of the assessee company and AO was directed accordingly. The revenue is in appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate has not been completed during assessment year 1992-93 following the project completion method consistently followed by your appellant. 4. The Commissioner of Income-tax (Appeals) 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(l)(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 ₹ 35,89,659 derived as per books on the basis of Project Completion Method be taxed instead of estimated profits of ₹ 70,40,106 made by the AO and upheld by CIT(A) XXV, Bombay. (iii) That only 12% of Gross Cash Receipts i.e. 'on money' of ₹ 35,89,659 be taxed as income following ITAT order in your appellant's own case in ITA No. 1759/Bom./1995 dated 7th August, 1995 for assessment year 1991-92 without prejudice that no income be taxed during assessment year 1992-93 as submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;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% on the gross receipts was applied by the AO. For adopting the rate of 12% on the gross receipts, the AO observed that during the assessment for the assessment years 1990-91 and 1991-92 profits were taken at the rate of 12% of the gross receipts and the same has been confirmed in appeal by the learned CIT(A) vide order dated 5-12-1994. The assessee's appeal with CIT(A) remained unsuccessful and that no ground against it was taken in appeal to the ITAT. 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 assessee is following the Project Completion Method. (2) The Auditors of the assessce company have not passed any adverse comments/remarks against the assessee and have merely shown their inability to make any comments on the profits earned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the expenses have been made outside the books of account. The learned DR argued that the rate of 12% 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% rate of profit was taken in appeal before the ITAT. 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 21-8-1990 and on 24-12-1992, 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 income. During the second search, in response to Question No. 50, the Director of the assessee company admitted that the company had received total amount of 'on money' ₹ 1,05,01,345 from prospective flat owners as on 30-11-1992. For the assessment year 1992-93 under appeal, the 'on money' amounted to ₹ 35,85,595 and accordingly the fact that 'on money' was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Govt. 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 ITAT for the earlier assessment year 1991 -92 and the assessee choose not to agitate the issue of application of profit rate of 12% before them. The only issue which they had agitated before ITAT was regarding claim of expenses against estimate of income from 'on money' of ₹ 1,44,52,775. In this case as a result of search, a computer sheet was found, which gives details of 'on money' receipts from the buyers of the flats (which were not recorded in the books of account) and assessec admitted the fact of receipt of 'on money'. The assessee has claimed expenses out of 'on money', which are not recorded in the books of account. The fact of receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's case under section 132(1) of the Act on 21-8-1990 and 24-12-1992, that in the course of the search the director of the assessee-company had stated that the assessee had received a total amount of ₹ 1,05,01,345 from prospective purchasers as on 30-11-1992 and that in the course of the first search a computer sheet showing on money receipts of ₹ 1,04,44,834 was found. He further found that the total on money receipt during the relevant previous year amounted to ₹ 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 receipts unearthed during the two searches. Nothing that the on money receipts of ₹ 35,85,595 has been received from different persons and not the same persons who paid monies earlier, the amount was brought to tax as unaccounted on money receipts. The claim of the assessee that expenses made in cash should be deducted from the aforesaid amount of on money receipts was rejected. 3. As regards the transactions which were recorded in the assessee's books of account, in respect of which the assessee had shown net pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.72% 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% of the on 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 Accountant Member accepted the assessee's contention that in respect of the recorded transactions the book results have to be accepted in toto and no estimate of Jie profit at 12% of the recorded turnover could be made. The learned Judicial Member however agreed with the Income-tax authorities and held that they were justified in estimating the profits in respect of the recorded transactions at ₹ 70,40,106. 7. The Members having differed in their conclusion in respect of the assessee's appeal, the difference of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons given by the Judicial Member in paragraph 9 of his order in support of his conclusion that the Income-tax 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 the attitude towards even the recorded transactions. 9. In support of his contentions, Mr. Trivedi drew my attention to the paragraph entitled Low gross profit, whether book result can be rejected , at page 3504 of the commentary of Chaturvcdi and Pithisaria, Fourth Edition, Volume 3. In addition, he cited the following judgments and orders : (1) Himachal Shoddy Mills (P.) Ltd. vs Dy. CIT [1994] 50 TTJ (Delhi) 398; (2) Chandra Timber Traders vs Dy. CIT[1996] 54 TTJ (De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 reject the results disclosed in the books in respect of the recorded transactions. My attention in this connection was drawn to page 3457 of Chaturvedi and Pithisaria's book, Volume 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 arises, as formulated by the question referred to me, is whether the book results shown by the assessee in respect of the business whose transactions are recorded should be accepted or a rate of 12% should be applied on the same, as was applied in the case of the unaccounted transactions. Before I examine this point of difference between the learned Judicial Member and the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic sub-section under which he has rejected the books of account. However, reading the entire paragraph 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 paragraph 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 Income-tax authorities. In my view, the fact that the rate of profit declared by the assessee was much less at 6.72% as compared to 10% as per the director's statement and 12% as per the comparable case of Natasha Construction Pvt. Ltd. are only supporting facts for rejecting the book results. Even the report of the auditors referred to by the Assessing Officer is only an additional reason for rejecting the book results. In my opinion, reading the entire paragraphs 5 and 6 of the assessment together, it is clear that the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion 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 render the provisions of section 145(2) otiose. In every case where a part of the transactions is kept away from the knowledge of the income-tax authorities, it would 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 transactions relating to the business is kept away from the books of account disclosed to the income-tax authorities. There has to be a faithful and true recording of all the transactions of the business in the books of account which are meant for the scrutiny of the income-tax authorities. It is no doubt true that any insignificant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 construction business has been kept outside the knowledge of the income-tax 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 Alumnium Industries (P.) Ltd. (supra) is 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 specific finding that the accounts were not correct or complete. The facts before me are quite different and here a part of the transactions have been kept outside the books of account and thereby the books are open to the charge of being incomplete o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Jagdish Oil Mill's case (supra) 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 Prahalddas Hart Kishan vs Asstt CIT[1998] 60 TTJ (Indore) 27, another order of the Indore Bench of the Tribunal cited before me the facts are similar to the facts in MewarPofytex (P.) Ltd. 's case (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 to section 145(2) of the Act, still the rejection of the books cannot be upheld because he had not made the assessment under section 144 as contemplated by section 145(2). He also submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative had submitted that the profit rate of 12% 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% 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 income-tax 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 me. 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 difference between the two learned Members, is whether the rate of 12% should be applied both on accounted and unaccounted turnover of the assessee. The question does not permit me to examine whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
