THE ASSTT. COMMR. INCOME TAX, CIRCLE-1,, RAJKOT-GUJARAT vs. M/S KRISHNA DEVELOPERS,, RAJKOT-GUJARAT

आयकर अपीलीय अिधकरण, अहमदाबाद �यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT (CONDUCTED THROUGH E-COURT AT AHMEDABAD) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER And SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.620/Rjt/2014 With C.O.No.4/Rjt/2015 �नधा�रण वष�/Asstt. Year: 2011-2012 A.C.I.T., M/s.Krishna Developers, Circle-1, Business Centre, Vs. Junagadh. 1st Floor, Bus Station Road, Lal Bahadur Society, Junagadh.

PAN: AAEFK0952H

(Applicant) (Respondent) : Revenue by Shri Praveen Verma, Sr.D.R Assessee by : Shri Mehul Ranpura, A.R सुनवाई क� तार�ख/Date of Hearing : 25/03/2019 घोषणा क� तार�ख /Date of Pronouncement: 27/05/2019 आदेश/O R D E R PER WASEEM AHMED ACCOUNTANT MEMBER The captioned appeal and the CO have been filed at the instance of the Revenue and Assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-IV, Rajkot dated 28/08/2014 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") dated 14/03/2014 relevant to Assessment Year (AY) 2011-12. The assessee has filed Cross Objection No.4/Rjt/2015 in

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the Revenue’s appeal bearing no.620/Rjt/2015 for the Assessment Year 2011- 2012.

The Revenue has raised the following ground of appeal 1. On fact and circumstances of the case and in law, the Ld.CIT(A) has erred in law and on facts in deleting the action of the A.O. of invoking the provisions of Section 145(3). 2. On facts and circumstances of the case and in law, the ''Ld.CIT(A) has erred in law and on facts in upholding addition of Rs.8 lacs only and deleting the addition of Rs.91,60,610/- 3. Any other grounds that the revenue may raise before or during the proceeding before the Hon’ble I.T.A.T. 4. On the facts of the case in law, the ''Ld.CIT(A) ought to have upheld the order of the AO. 5. It is, therefore, prayed that the order of the C.I.T-(A) may be set aside and that of the A.O. be restoted to the above extent.

The First issue raised by the Revenue in the ground no. 1 is that the Ld. CIT (A) erred in rejecting the order of the AO for invoking the provision of section 145(3) of the Act and deleting the addition made by the AO for Rs. 91,60,610.00

2.1 During the assessment proceedings the AO noticed the following discrepancies 1) The assessee during the year under consideration has shown gross contract receipt of Rs. 32,10,89,005/- and declared a net profit of Rs.

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64,83,391/- which is 2.02% of gross receipt. The net profit declared by the assessee is very low in the line of the civil construction business.

2) As per clause 28 of the form 3CD of the audit report, it was found that the assessee has not maintained the quantitative details of stock. The assessee not maintained the stock register of material purchase, consumed.

3) As per the audit report, the assessee has estimated the value of opening and closing stock.

4) There was no separate account maintained by the assessee regarding the work done through sub-contractors.

5) The purchases from the unregistered dealer were supported by the internal voucher only.

6) The permanent attendance register for labor was not maintained.

7) There was no measurement workbook maintained by the assessee.

8) The Work expenses, labor charges, miscellaneous site expenses, site kitchen expenses were paid in cash, and self-generated vouchers kept in record. In view of the above, the AO issued notice proposing to reject the books of accounts under section 145(3) of the Act to the assessee.

2.2 The assessee in response to the notice submitted as under:

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General submission

1) Books of accounts, vouchers, bills, etc. were produced for the verification. 2) The assessee sub-contracted the work amounting to Rs. 13,91,68,177/- out of the total contract of Rs. 32,10,89,005/-. The chart containing the name of the sub-contractor, paid the amount and TDS details were submitted. 3) The provisions of section 145(3) of the Act are applicable where the AO is not satisfied with the correctness or completeness of the accounts, and the assessee has not been following the method specified in sub-section (1) of accounting standard as notified under sub-section (2) regularly. In relation to non maintenance of quantitative records

The assessee submitted that it was not possible to maintain the quantitative records of building material as it is operating around 10-15 sites at a time. However, the materials are consumed as per the quantity quoted in the tenders. Further to maintain quantitative records at the site, the assessee needs to employ the commerce people at each site. But in present days it is difficult to meet the trained employee for the remote site.

In relation to work in progress valued at an estimated cost

The valuation of work in progress is made on an estimated basis because the valuation cannot be made by allocating the cost on one to one basis. The assessee consistently followed the same valuation method of WIP. Further,

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the closing WIP become the Opening WIP of the subsequent year. Therefore the tax effect of the valuation of the WIP will remain nil.

In relation to purchasing from the unregistered dealer

The assessee during the year under consideration has purchased materials from the Unregistered Dealers amounting to Rs. 41,25,886/- out of which the amount of Rs. 18,73,867 paid through cheque and balance amount of Rs. 22,52,019 was paid in cash. The persons from whom the materials were purchased are identifiable. The sites of the assessee are in a remote area. The vendors are the small person, and it is not expected from them to maintain the bank account and get a registration certificate with VAT.

The assessee prefers to purchase from registered dealers because in case of purchase from the unregistered dealer, the tax paid by the assessee cannot be set off. However, if the assessee purchased from the registered dealer, he will get the benefit of tax paid on such purchase by set off the tax.

The self-generated vouchers are amounting to Rs. 22.52/- lacs which are less than 1% of gross receipt.

In relation to non maintenance of permanent attendance register.

The work operation is carried out around 10-15 sites at a time. During the operation of sites, the attendance registers are kept. Once the sites are completed and account of labor settled, the registers are not further maintained as permanent records. As such, due to the large scale of work, it is

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not possible to maintain permanently. However, the vouchers are available in the record through which the payment was made.

In relation to the vehicle log book.

The assessee owned 5 motor cars which are used by the director as well as staff working at different sites. However, the personal use of vehicles cannot be ruled out.

2.3 However, the AO rejected the contention of the assessee by observing as under: 1) The reason given by the assessee for non-maintenance of the stock ledger that the trained human resources are not available at the remote sites is not acceptable.

2) The assessee admitted that the valuation of the stock is made based on an estimate.

3) The assessee admitted that the major portion of the URD paid through self-generated voucher hence the expenses is not verifiable.

4) The assessee did not give any valid reason for non-maintenance of the log book vehicle. In view of the above, the AO invoked the provision of section 145(3) of the Act and estimated the profit as under:

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2.4 Under the provisions of section 44AD of the Act, the reasonable profit is about 8% of gross receipt.

2.5 In case of sub-contractors, who executed the work without machinery, capital, and experience earn a profit margin of 3% of the gross receipts. In the present case, the assessee is a partnership having vast experience, substantial capital, and large machinery. Thus the margin 8% is reasonable.

2.6 Accordingly the AO worked out the profit on gross receipt as under:

Profit on self executed contact work of Rs. 18,9,20,828@ 8%Rs.1,45,53,666/- profit on sub contract work of RS. 13,91,68,177/- @3% Rs. 41,75,045/-

2.7 The AO finally made the addition of Rs. 99,60,610/- to the total income and assessed the total income of the assessee at Rs. 1,64,73,810/-.

1) The AO rejected the books of the account without pointing any specific defect or discrepancy, in the audited books of accounts, any suppression or inflation of cost or expenditure.

2) Books of account of the assessee are subject to audit u/s 44AB of the Act. Neither the auditor nor the AO found out any defect or discrepancy therein.

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3) Further, the provision of section 44AD comes into play when the turnover of the assessee is less than Rs. 60 lacs and assessee does not maintain the books of account & opt for deeming provision. Even in the case where the turnover is less than Rs. 60 lacs and the assessee maintains books of account and declares NP less than 8% the AO has no power to determine profit by applying @ 8% unless the specific defect is brought on record.

4) All the purchase and other expense were duly recorded in the books of account which were also verified by the AO without any adverse finding except that the voucher of payment is self-generated and some of them were incurred in cash.

5) In the case of sub-contractor, all the details were provided to the AO along with their ROI. The AO has not pointed out any adverse remark in applying the estimated profit percentage of 3%.

6) The other replies of the assessee are incorporated on page no 5 to 9 of the Ld. CIT (A). For the sake of brevity, the same has not been reproduced.

7) The AO accepted the profit ratio in the earlier two years. In the year under consideration, the turnover of the assessee is double from the preceding year. The profit percentage of the earlier year as detailed under:

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Sr.No. A.Y. Contractual receipts Net Profit % of N.P 1 2009-10 9,50,24,554/- 10,53,354/- 1.11 2. 2010-11 18,36,59,269 34,27,869 1.87 3. 2011-12 32,07,61,675 64,83,391 2.02 5.00 Average 1.67

As such, the net profit in the year under consideration is higher than in the earlier years.

3.1 Further detail of work done through the sub contractors in the year under consideration and in the earlier year as detail under:

Particulars Earlier year current year Gross receipt 18.36 crore 32.08 crore Work through sub contractor 10.32 crore 13,92 crore Percentage of sub contract 56.30 43.27% No of sub contractor 19 32 It is very clear from the above that the % difference in sub-contracted work from the earlier is slightly different.

3.2 The Ld. CIT (A) after considering the submission of the assessee observed as under:

1) From the order of the AO, it is seen that no specific defect or discrepancy in the books of accounts are brought on record. No

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finding of the AO that there is any change in the method of accounting and maintenance of the books of account.

2) It is clear from the chart submitted by the assessee that the profit percentage in the current year is higher than the earlier year even the turnover is also higher from the preceding year 3.3 In view of the above, the action of the AO rejecting the books of account of the assessee is incorrect. The Hon’ble Supreme Court also held in the case of Radha soami satsang that the consistency should be applied to the income tax proceedings. Accordingly, the Ld. CIT (A) allowed the appeal of the assessee and held that the AO wrongly invoked the provision of section 145(3) of the Act.

3.4 Regarding the estimation of the profit, the ld. CIT (A) observed certain facts as detailed under:

1) If the assessee does not maintain the stock register then, certain doubt arises in mind, but the AO is required to verify the expenses in details and analysis the comparables to remove his doubts and find out the logical conclusion. But there is no such exercise done by the AO. Hence the estimation of profit cannot be sustained.

2) The valuation of the stock was submitted before the AO, but no defect in the valuation of the stock was pointed out. Hence the action of the AO was not correct to reject the books of account and estimate the profit.

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3) All the detail relating to subcontractor such as ledger accounts, PAN, ROI, etc. were filed before the AO, but no defect was pointed. Furthermore, it is not mandatory under any provision of law to maintenance the sub-contract account separately to determine the profit. Hence the action of the AO to reject the books and estimate the profit will not survive.

4) The purchases from the URD are minor with respect to the total turnover of the assessee. The parties from whom the material purchased were verifiable. The Purchase from URD is not prohibited under the Law. Thus the AO, without pointing out any adverse remark, cannot reject the books of account and estimate profit of the assessee.

5) The assessee does not maintain the labor registers, but the vouchers through which the payment is made to labor were available before the AO, but the AO did not point out on record any defect leading to false representation by the assessee. The action of the AO to reject the books of account and estimate the profit of the assessee on this ground is rejected.

6) The other finding of the Ld.CIT (A) is incorporated on page no 17 to 19 of his order. 3.5 In view of the above the ld. CIT-A rejected the action of the AO by reversing the rejection of the books of accounts. As such, there is no adverse finding regarding purchase, receipt, expenses, stock. Therefore rejection of books of account is not sustainable.

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3.6 The ld. CIT-A further held that the provisions of section 44AD do not apply to the assessee, and there is no basis to work out the estimated profit. But the ld. CIT-A in the interest of Revenue directed the AO to make ad-hoc disallowance of Rs. 8 lacs out of the expense claimed by the assessee.

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7.1 Now, the following issues emerge for our consideration: i. Whether the books of accounts of the assessee are liable to be rejected under section 145(3) of the Act in the given facts and circumstances. ii. Whether the profit estimated at the rate of 8% and 3% as discussed above is reasonable in the event, the rejection of the books of accounts is upheld. iii. Whether the ad-hoc disallowance made by the Ld.CIT (A) for Rs. 8 lacs is justifiable in the given facts and circumstances. 7.2 Regarding the rejection of the books of accounts, the provisions are contained under section 145(3) of the Act, which reads as under: 98[Method of accounting. 99 “(3) 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.]”

7.3 From the preceding discussion, we note that the AO has rejected the books of accounts due to certain reasons which have been elaborated in detail in the preceding paragraph. Now we evaluate the reasons for the rejection of the books of accounts by the AO one by one in the manner as detailed below: I. The low net profit ratio In the present case, the net profit was declared by the assessee as per the books of accounts which were duly audited under section 44AB of the Act. Moreover, the rate of profit declared by the assessee in the year under consideration was better than the preceding assessment years as evident from the submissions of the assessee which is reproduced as under:

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Sr.No. A.Y. Contractual receipts Net Profit % of N.P 1 2009-10 9,50,24,554/- 10,53,354/- 1.11 2. 2010-11 18,36,59,269 34,27,869 1.87 3. 2011-12 32,07,61,675 64,83,391 2.02 5.00 Average 1.67

7.4 However, the net profit ratio cannot be a factor to reject the books of accounts. As such, the books of accounts of the assessee can be rejected by the AO under two circumstances only. Firstly, if the AO is not satisfied with the correctness or the completeness of the books of accounts and where the assessee doesn’t follow the method of accounting on a regular basis. In the case on hand, the AO has not alleged any defect regarding the correctness/completeness of the books of accounts and the method of accounting regularly employed by the assessee. Thus in our considered view, the basis adopted by the AO for the rejection of the books of accounts of the assessee cannot be sustained.

II. Non-maintenance of quantitative detail of the stock

Regarding this, we note that the non-maintenance of the stock register cannot be the basis for rejecting the books of accounts maintained by the assessee. In holding so, we find support and guidance from the judgment of Hon’ble Calcutta High Court in the case of Ashoke refractories private Ltd Vs.CIT reported in 279 ITR 457 wherein it was held as under: “In order to reject the books of account, the Assessing Officer has to come to an opinion that the methods applied are such that the income cannot properly be deduced from the accounts so maintained. It is not a question of establishment of the same by the assessee. It is an opinion of the Assessing Officer, which is material. In order to arrive at such a conclusion, it must be shown that the Assessing Officer has taken into consideration the various factors and has not omitted to consider the materials before him and has come to a conclusion that the method applied is such that from the accounts the income could not be deduced. [Para 6.1]

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In the instant case the regular accounts were being maintained and only on the ground of absence of the stock register, it could not be held that the accounts maintained were such that the income could not be deduced and, therefore, the books of account could not be rejected. [Para 6.2]

The Assessing Officer observed that for certain months, the weight of the semi-finished products was higher than the weight of the raw materials consumed. But on the basis of calculation it could not be said that the semi-finished products weighed more than the raw materials available with the assessee. [Para 6.3]

There was no finding that in the opinion of the Assessing Officer, the methods applied were such that the income could not be deduced from the books of account maintained by the assessee or that the accounts were not correct or complete. The Tribunal, on the other hand, had based its order on the ground that the reasons given in the order of the Commissioner (Appeals) for the assessment year 1991-92, for deleting the addition made by the Assessing Officer were not matching with those of the Assessing Officer given in the assessment order. The difference of reason could not be a factor for disagreeing with the decision of the Commissioner (Appeals). [Para 6.4]

Without a finding or forming an opinion indicated in expressed terms in the section itself, the books of account could not be rejected merely in the absence of stock register or failure to maintain item-wise stocks in the stock register, when there were other materials available from which income could be deduced. In a case where books of account are so rejected without the ingredients of section 145 being fulfilled, such rejection is perverse and void. [Para 6.5]

Therefore, the books of account for the relevant assessment years could not be rejected and as such the order of the Tribunal in both the cases was liable to be set aside. [Para 6.6]

For all those reasons, the rejection of the books of account only in the absence of stock register for the assessment year 1990-91 having regard to the availability of other materials from which the income could be deduced, was contrary to the proviso to section 145 unless there was a finding or opinion either that the records were incorrect and incomplete or that the method of accounting applied was such that the income could not be deduced from the accounts maintained by the assessee. [Para 7]

In respect of the assessment year 1991-92, the stock register was there, but the fact that only on the ground that the item-wise stock register was not maintained, and, therefore, the accounts were sought to be rejected, was absolutely perverse and could not be sustained in the absence of anyopinion expressed or any finding arrived at to the effect that the accounts maintained were incorrect or incomplete or that the method of accounting applied was such that the income could not be deduced. In the absence of any such finding, the account books could not be rejected merely on the ground that item-wise stock was not maintained in the stock register. [Para 7.1]

In the result, the appeal was allowed.”

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III. Non maintenance of separate account regarding the work done through sub-contractor. There is no requirement under the provisions of law to maintain a separate account for the work done through the subcontractor. Therefore this cannot be the basis for the rejection of the books of accounts.

IV. Purchase from unregistered dealer supported by the internal voucher only.

Similarly, the purchases from the unregistered dealer cannot be a ground for rejecting the books of accounts until and unless it is found that these are bogus to the satisfaction of the AO.

V. Permanent attendance register for labor is not maintained. Similarly, non-maintenance of the labor registers cannot be a reason for rejecting the books of accounts.

VI. No measurement book maintained by the assessee.

Similarly, there is no requirement under the provisions of law to maintain measurement book by the assessee. In case of any doubt, the AO can verify the same from the concerned party.

VII. cash expenses based on self-generated vouchers

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There is no denial under any provisions of the Act to incur the expenses in cash. Considering the volume and nature of the business it is quite possible to incur the expenses in cash. Therefore in our considered view, this cannot be the basis for the rejection of the books of accounts.

In view of the above, we hold that the books of accounts of the assessee are not liable to be rejected.

7.5 Without prejudice to the above, we also note that once the books of accounts have been rejected, the only resort available to the Revenue to estimate the profit of the assessee based on some scientific method. As such, the AO cannot estimate the profit arbitrarily. In our considered view, once the books rejected, then the AO can take the guidance for estimating the profit from the financial statements of the assessee for the preceding assessment years. But in the case on hand, the AO has not done so. The AO has taken the guidance for estimating the profit at the rate of 8% from the provisions of section 44AD of the Act, which does not apply to the assessee.

7.6 We find support and guidance from the judgment of Hon’ble Madras High Court in the case of R.V.S. & sons dairy farm Vs. CIT (2002) reported in 257 ITR 764 wherein it was held as under: “Each year is an independent unit for which the liability for tax has to be determined, and this would be so even when the assessee’s account books are not accepted. Nevertheless, the examination of the available data, or estimate for each year separately would have to be considered, and only thereafter the liability determined. [Para 3] While an estimate by definition has to be that only, and no precise yardstick can be found by which to make such an estimate wholly devoid of some element of subjectivity, nevertheless the estimate to be done should be in relation to the figures available for each year and one must take note of the prior record of the assessee as well. [Para 4] The assessee carried on a dairy industry. It had pointed out several features in the business run by it which was thirty years old which distinguished it from other dairy units which might have reported larger profits. The Tribunal had found some of those distinguishing

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features to be in fact true. In that background, the Tribunal was not acting in accordance with law, in making an ad hoc choice of percentage and applying it uniformly for several years even while noticing that for the year immediately following the last of the years before it the percentage of profit had been accepted by the ITO at only 9.5 per cent. [Para5] The matter was remanded to the Tribunal to consider the profit margin for each of the years in question separately. While the Tribunal has power to substitute a different rate, that determination shall have to be in accordance with law and with reference to the relevant data for each assessment year.”

7.7 In view of the above, we hold that there is no infirmity in the order of the Ld.CIT (A). Accordingly, we uphold the same. Hence the ground of appeal of the Revenue is dismissed.

Coming to the C.O No.4/Rjt/2015 of the assessee: 8. At the outset, we note that there is no provision under the Act to make the disallowance on ad hoc basis. For making any disallowance, it is necessary to find out the specific defect in the expenses claimed by the assessee. However, in the case on hand, no such specific defect has been pointed out by the Ld.CIT (A). Therefore we are not inclined to uphold the order of the Ld.CIT (A) for the ad hoc disallowance of Rs. 8 lacs only. Hence the ground raised by the assessee in its CO is allowed.

Order pronounced in the Court on 27/05/2019 at Ahmedabad. -Sd- -Sd- (RAJPAL YADAV) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 27/05/2019 manish