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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’, NEW DELHI
Before: SHRI O.P. KANT & SHRI KULDIP SINGH
PER O.P. KANT, AM:
This appeal by the Revenue is directed against order dated 17/03/2015 passed by the Ld. Commissioner of Income-tax (Appeals)-1, Gurgaon [in short ‘the Ld. CIT(A)’] for assessment year 2009-10, raising following grounds:
1. The Ld.CIT (A) has erred in cancelling the estimation of net profit @ 5% ignoring the findings of the Assessing Officer in rejecting the account books by invoking the provision of 145(3), where there were sound reasons for the said rejection.
2. The Ld.CIT (A) has erred in deleting the addition of Rs. 1,31,96,254/- made by the AO by invoking the provision of section 145(3) even though the assessee has not furnished the genuineness of incurring the expenses wholly and exclusively for the purpose of business. 3. The Ld.CIT (A) has erred in disregarding the merits of the present case in respect of business expenses, particularly when the assessee could not furnish the justification of claim and business contingency of incurring of these expenses. 4. That the appellant craves for the permission to add, delete or amend grounds of appeal before or at the time of hearing of appeal.
At the outset, we may like to mention that despite notifying, on the date of hearing neither anyone attended on behalf of the assessee nor any adjournment was filed. On the last occasion also none attended on behalf of the assessee. In view of the circumstances, the appeal is heard ex parte, qua the assessee.
Briefly stated facts of the case are that the assessee company was engaged in dealing structural steel fabrication and installation work. For the year under consideration, the assessee filed return of income on 29/09/2009, declaring nil income. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (for short ‘the Act’) was issued and served upon the assessee. The Assessing Officer noted that the employees of the company attended the assessment proceedings, however, complete books of accounts, bills, vouchers etc were not produced before the Assessing Officer. In the assessment order, the Assessing Officer has given details of the dates on which opportunity was granted to the assessee to produce books of accounts and bills etc. and the non-compliance on the part of the assessee. Looking to the non-compliance on the part of the assessee, the Assessing Officer issued show cause notice as why the business income might be estimated applying profit rate. No compliance was made on the part of the assessee of the said show cause notice also. In view of the facts noted and fall in net profit rate to 1.13% as compared to net profit rate of 5.82% in the immediately preceding year, the Assessing Officer recorded following observation in respect of the expenses claimed by the assessee:
I. During the year, assessee has paid rent of Rs. 62,51,809 as against paid during the preceding year at Rs.12,29,448/-. II. Administrative & other expenses are claimed at Rs. 3.6 Crore as against Rs. 2.47 Crore claimed during the immediate preceding year. II. It is found that the assessee has debited an amount of Rs.51,91,667/- on account of Directors’ remuneration/fee, whereas it was not claimed during the previous year. III. The assessee has made heavy addition of Rs.4,72,80,249/- to its fixed assets and claimed depreciation but failed to prove that these assets are used for business purposes during the year under consideration. V. The assessee has not maintained proper bills/vouchers for the expenses claimed and the hence the expenses are unverifiable.
3.1 In view of the defects pointed out by the Assessing Officer, he rejected books of accounts of the assessee invoking provision of section 145(3) of the Act and applied net profit rate of 5% on the receipt of Rs.54,25,61,637/- and worked out business profit of Rs.2,71,28,082/-. The Assessing Officer allowed depreciation of Rs.1,11,90,166/- on the said business profit and computed net profit of Rs.1,59,37,916/- for making addition. 3.2 The Assessing Officer also made other additions. The carried forward losses were allowed to be adjusted and total income was assessed at Rs.1,40,47,851/-. 3.3 Aggrieved assessee filed appeal before the Ld. CIT(A) and filed detailed submission contesting the rejection on books of accounts and estimation of the net profit. The Ld. CIT(A) partly allowed the appeal of the assessee. Aggrieved with the finding on the issue of rejection of books of accounts and estimation of the profit, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.
The ground Nos. 1 to 3 of the appeal are in respect of issue of cancellation by the Ld CIT(A) of rejection of books of accounts invoking section 145(3) of the Act and estimation of the profit. 4.1 The Ld. DR submitted that books of accounts and vouchers have not been produced by the assessee before the Assessing Officer during the assessment proceeding despite numerous opportunities provided to the assessee and therefore the action of the Assessing Officer in rejecting the books of accounts invoking section 145(3) of the Act was justified. 4.2 We have heard the submission of the Ld. DR and perused the material on record including the impugned order passed by the Ld. CIT(A). We note that the Ld. CIT(A) has addressed the Assessing Officer rejected books of accounts of the assessee. The relevant finding of the Ld. CIT(A) is reproduced as under:
“4.4 I have considered the facts of the case and gone through the submissions of the appellant. The A.O rejected the books of account and estimated profit rate @ 5% of gross receipts after recording certain observations concerning the huge increase in expenses during the year under consideration as compared to the preceding year. The main reasons for rejecting the books of account were the fall in net profit rate from 5.82% in the immediately preceding year to 1.13% during the year under consideration and huge increase in expenses during the year on account of Rent, Director's Remuneration, Administrative and other expenses coupled with massive addition to fixed assets resulting in huge claim on account of depreciation. The fall in net profit rate was not on account of any item in the Trading/Manufacturing account since the G.P Rate during the year under consideration was 17.29%, much higher than 15.68% G.P Rate recorded by the appellant in the immediately preceding year. Thus the rejection of books of account was on account of increased expenses claimed by the appellant in its P&L account. Let us examine the allowability of these expenses as per law and in the light of evidence furnished by the appellant during the course of appellate proceedings. In order to do this, let us examine the expenses which recorded a significant unexplained increase during the year under consideration, because of which the A.O rejected the books of account:- i) Rent paid:-The appellant claimed an amount of Rs.62,51,809/-, on account of rent during the year, which was much higher than Rs. 12,29,448/- claimed in the immediately preceding year. Since the AO was not satisfied with the details provided by the appellant in respect of its claim of rent, he held the same as unexplained. During the course of appellate proceedings, the appellant drew the attention of the undersigned towards various documents filed by it during the course of assessment proceedings (filed along with letter dated 5.12.2011) which were ignored by the AO, resulting in treatment of claim on account of rent as unexplained. These details include rent agreement in respect to each premises together with the purpose for hiring the same on rent. Proof of deduction of tax at source, wherever applicable, was also filed by the appellant. In addition, the appellant submitted that the rent claimed during the immediately succeeding year was much higher at Rs. 88,95,424/- which was accepted by the A.O. in her order u/s 143(3) of the Income Tax Act.
The full details of expenses on account of rent along with the precise purpose for hiring various premises are given in the following table:-
LOCATION OWNER SITE FOR USED FOR RENT MONTHS AMOUNT F.Y. 2008-09 (IN RS.) BANGALORE PRODUCT SHOP 1.5 487,500 KRISHVI PROJECTS - - PVT. LTD. - - BANGALORE DSUNDAR PROJECT OFFICE BANGALORE J. MANJUNATHA PROJECT OFFICE 8.0 200,000 - - DELHI PRODUCT SHOP 2,250,000 QUICK 10.0 PORTFOLIO DELHI AMIT BEDI OFFICE 10.3 160,310 DELHI GO DOWN 3.0 18,000 JINDAL STAINLESS LIMITED GURGAON - - SHASHI MESS#SAP CREATIO STAFF GURGAON ELECTRO VISION HEAD OFFICE 12.0 807,300 GURGAON PRODUCT SHOP THE 6.0 600,000 HOMEMAKERS HYDERABAD K. SARDA PROJECT OFFICE 5.0 45,357 KERALA BAIJU - - MESS#SITE STAFF MUMBAI MESS#SITE 10.9 98,113 BHASKAR STAFF DAMODAR CHOKER MUMBAI 77,334 FULMALA MESS#SITE 8.6 SHABUDDIN STAFF MUMBAI MESS#SITE - KISAN STAFF MURLIDHAR CHAKOR MUMBAI MESS#SITE 7.5 67,877 RAMASHANKAR STAFF HARJAIVAN JOSHI MUMBAI 10.9 98,105 SUNDER KANU MORE MESS# SITE STAFF MUMBAI ~ - SHANKAR P. MESS#SITE KAMBLE STAFF MUMBAI OFFICE 660,165 BINA S 8.8 RAMCHANDANI MUMBAI OFFICE 660,165 SUNIL 8.8 RAMCHANDANI MUMBAI OFFICE ~ - JITENDRA SHENOY NOIDA OM PRAKESH OFFICE 12.0 21,583 - - Total 6,251,809 Rent agreements in respect of all premises was submitted by the appellant during the course of assessment and appellate proceedings. On a perusal of the aforesaid details, it is crystal clear that the appellant paid rent in respect of various premises used for the purpose of business during the year under consideration. In the subsequent year, the appellant has paid a much higher rent to the owner of respective premises which was allowed by the A.O. It is extremely surprising to note that the A.O, despite getting necessary evidence and detailed purpose regarding expenses incurred on account of rent, did not acknowledge the same in the assessment order and held rent expenses as unexplained resulting in rejection of books of account. Since the appellant could substantiate the business purpose of the premises in respect of which rent was paid and could furnish requisite evidence in the form of rent agreement, TDS etc., no disallowance can be made on this basis. Furthermore, the A.O. erred in rejecting the books of account on the basis of substantial increase in expenses on account of rent. ii) As regards Director's Remuneration amounting to Rs.51,91,667/-, the A.O noted that no claim was made by the appellant under this head in the immediately preceding year in sharp contrast to the amount of Rs. 51,91,667/-, claimed during the year under consideration. This was one of the reasons for rejection of books of account of the appellant. During the course of appellate proceedings, the appellant submitted that full details regarding Director's Remuneration had been given during the course of assessment proceedings. The details submitted include a certified true copy of the Resolution passed in the meeting of the Board of Directors of the appellant company on 03.10.2008 as per which Smt. Deepika Jindal was to be entitled for remuneration of Rs. 7,41,666 per month for a period of 3 years w.e.f 01.09.2008 to 31.08.2011. In addition to this, the appellant submitted that Smt. Deepika Jindal, to whom the remuneration was paid, belongs to business family of O.P Jindal Group and has experience of more than 21 years in corporate and business management. She was managing complete affairs of the company during the period the remuneration was given to her. More importantly, the appellant also gave approval letter issued by the Ministry of Corporate Affairs, Government of India dated 30.07.2009 approving total remuneration of Rs. 7,41,666/- per month for a period of 3 years w.e.f 01.09.2008 to 31.08.2011. Since the appellant gave all details substantiating the aforesaid expenses, how could the A.O reject books of account on account of the fact that Director's remunerations was not properly supported by requisite evidences? The only issue which is relevant in case of Director's Remuneration is the allowability of such expenses, as per provisions of Section 40A(2)(b) of the Income Tax Act in terms of reasonableness of such payment. As regards the reasonableness of the expenditure, I hold, on the basis of Rs. 3.5 Lakhs per month was reasonable. As per Companies Act, this is the amount of Director's Remuneration, a company having similar effective capital is authorized to pay without seeking the approval of the Central Government. Hence the excess amount of Rs. 27,41,662/- is hereby disallowed as per provisions of Section 40A(2)(b) of the Income Tax Act. Furthermore, I hold that since the appellant had filed requisite evidence substantiating the claim of Rs.51,91,661/- on account of Director’s Remuneration, the A.O. could not have rejected books of account on the basis. iii) As regards increase in administrative and other expenses from Rs.2.47 crores in the immediately preceding year to Rs.3.6 Crores during the current year, I agree with the contention of the appellant that since this increase is primarily on account of Rent and Director’s Remuneration which have already been discussed in detail, no separate comments are required. In addition to these expenses, there are some other expenses which have already been considered as Fringe Benefits by the appellant and the same has been duly accepted by the department in the FBT return filed by the appellant. iv) As regards additions to fixed assets amounting to Rs. 4,72,80,249/-, the appellant gave a copy of invoices of various items of capital assets acquired during the year under consideration. This included 4 Roll section Binding Machine imported from Italy for 47,500 Euros, CNC Binding folding machine for 2,11,500 Euro etc. Not only did the appellant gave copy of invoices to the A.O., but also the proof of installation of various machines to be used for the purpose of the business of the appellant was also provided. It is not comprehensible that even after getting the requisite evidence, the A.O held additions to fixed assets made during the year under consideration as unexplained. If, the depreciation was rightly claimed on the basis of capital asset acquired and installed by the appellant during the year under consideration, the A.O could not have held huge additions to capital assets as one of the reasons for rejecting books of account. v) Lastly, the A.O has submitted that the appellant has not maintained proper bill/vouchers because of which he rejected the books of account. However, the A.O has not given any specific expense in respect of which proper bills/vouchers had not been been maintained by the appellant. The appellant, during the course of appellate proceedings, stressed the point that all its expenses are properly vouched and the AO has not given any particular instance of any expense which could not be properly supported by requisite evidence. Accordingly, I hold that, the A.O's sweeping remark that proper bills/vouchers have not been maintained, without giving any instance, where A.O for rejecting books of account is without any basis and is thus rejected.”
4.3 The Ld. CIT(A) has further analyzed the provisions of the section 145(3) of the Act and various judicial pronouncement on the issue of rejection of books of accounts. The relevant finding of the Ld. CIT(A) is reproduced as under:
“4.6 On the basis of the reading of provisions of Secion 145(3) of the Income Tax Act, it is obvious that the A.O may reject the books of account and make an assessment u/s 144 of the Income Tax Act on satisfaction of following conditions:- i) Where the A.O is not satisfied about the correctness and completeness of accounts;or ii) Where the method of accounting providing in 145(1) has not been regularly followed;or iii) Accounting standards as notified under 145(2) have not been followed. 4.7 In the present case the A.O rejected the books of account without specifying as to whether any of the above three conditions was satisfied. Furthermore, instead of passing order u/s 144 of the Income Tax Act, the A.O, even after rejecting the books of account, passed the order u/s 143(3) which is fallacious. If the A.O wanted to reject the books of account he should have given certain specific instances which could have proved that the accounts of the appellant are incorrect/incomplete. Besides, since the appellant company has been regularly following mercantile system of accounting, it has not violated provision of Section 145(1) of the Income Tax Act. As none of the conditions for rejection of books, mentioned in section 145 were satisfied, I hold that A.O should not have rejected the books of account in the appellant's case by making sweeping remarks and without examining voluminous documents submitted by the appellant during the course of assessment proceedings. 4.8 Before taking the final decision on this issue, let us examine various relevant judicial pronouncements on this issue, particularly from the viewpoint of another observation made by the AO before rejecting the books of account. This observation concerns the fall in net profits of the year under consideration compared to the net profit of the immediately preceding year. It has been held in the case of Pandit Brothers vs. CIT (1954) 26 ITR 159 (P&H) that before ITO to lead him to the conclusion that the method employed is defective or that the case required reconsideration and a new computation must be made. The mere fact that the profits are low is not material upon which finding regarding the rejection of books of account can be based. In the case of CIT vs. K. S. Bhatia (2002) 125 taxmann 454 (P&H), it was held that the mere fact that the profits are low compared to earlier years is not sufficient to make an estimate of net profits. 4.9 In another judgment of the Hon'ble Jurisdictional High Court in the case of CIT vs. Om Overseas (2008) 173 taxmann 185 (P&H) the assessee firm declared G.P rate of 25.38% as against 29.5% declared in the immediately preceding year. The A.O rejected the books of account and estimated G.P rate at 27%. On appeal, Commissioner(Appeals) deleted addition, holding that A.O made addition without pointing out any specific defect in books of account. The Tribunal upheld finding of Commissioner(Appeals). It was held by the Hon'ble High Court that there was no perversity in the order of the Hon'ble Tribunal. 4.10 In a very recent judgment of Century Tiles Ltd. vs. JCIT (2014) 51 taxmann.com 515 (Ahmedabad) it was held that where assessee maintained regular books of account which were duly audited, decline in gross receipts and disproportionate increase in expenses in certain heads of account, by itself, cannot be a ground to reject book results. The same is the view of Hon'ble Jharkhand High Court which, in the case of CIT vs. Anand Kumar Modi (2014) 44 taxmann.com 21 (Jharkhand) held that addition made after rejecting books maintained by assessee should be deleted when all quantitative details were available in books of account and account and accounts were regularly maintained. 4.11 The judgment of Hon'ble Madras High Court in the case of GVDI vs. DCIT (2014) 43 taxmann.com 246 is extremely pertinent to the facts of the case. In this case, it was held that when assessee explained reasons for fall in G.P and revenue did not verify same by substantial materials, impugned order of the A.O was to be set- aside. 4.12 The judgement by the Hon'ble Jurisdictional High Court in the case of CIT Faridabad vs. Smt. Sulochana Bhatia (2012) 20 taxmann.com 298 (P&H) needs to be mentioned here. In this case, the A.O, taking a view that assessee had not maintained books of account properly, rejected the same and made certain additions on account of suppression of receipts. On appeal Commissioner(Appeals) as well as the Hon'ble Tribunal deleted the said addition. On revenue's appeal, it was noted that assessee had produced receipts and the A.O had adopted method of estimation without there being any rational basis to support guess work.
Furthermore, no specific defect in books of account had been pointed out warranting rejection thereon. In view of the aforesaid, it was held by the Hon'ble High Court that the impugned order passed by Tribunal deleting addition was to be upheld. The relevant extracts of this judgment are reproduced hereunder:- "We have considered rival submissions. When the assessee had not produced any cable connection register, there is no basis available to the AO to estimate the number of connections issued by assessee. However, the receipts issued in respect of each connection were produced. The same were rejected merely because the name of subscriber is not mentioned or the full signature of the employee has not been mentioned. However, the facts remains that in this line of business, names are not mentioned in the receipts but as a proof of identity, the house numbers and sector is mentioned. The receipts are generally initialled only and neither the issuer of receipt nor the payer of the amount denies having paid the amount stated in the receipt. In the circumstances, the AO cannot reject the receipts issued on this flimsy ground that full signature of the employee who had actually issued receipt was not verifiable. The same could have been put to the assessee and who could have offered valid explanation in this regard. In the circumstances, we do not find any valid reason to reject the book results so as to sustain the addition made by the AO."
The Tribunal while affirming the findings of CIT(A) had recorded that the assessee had- Droduced receipts issued in respect of each connection and the assessing officer had adopted the method of estimation without there being any rational basis to support the guess work. Further, no specific defect in the books of account had been pointed out warranting rejection thereof. Learned counsel for the Revenue was unable to demonstrate that the conclusions recorded by CIT(A) and the Tribunal are perverse in any manner. We find that the findings recorded by the CIT(A) and approved by the Tribunal being based on record do not call for any interference. The substantial question of law is, thus, answered against the Revenue."
4.4 We note that the Ld. CIT(A) has examined the rent paid of Rs.62,51,809/- during the year under consideration. The Ld. CIT(A) has noted that during the assessment proceeding the assessee filed all the document in respect of rent agreement of the premises and proof of tax deducted at source, wherever applicable was also filed. The Ld. CIT(A) has reproduced the entire detail of the rent paid in the impugned order. In view of the necessary evidence filed in support of the claim of the rent paid, the Ld. CIT(A) is justified in holding that books of accounts cannot be rejected on the basis of increase in expense on account of rent. Similarly, the Ld. CIT(A) has examined the claim of expenses of Rs.51,91,667/- on directors’ remuneration, administrative expenses of Rs.3.6 crores, purchase of fixed assets amounting to Rs.4,72,80,249/- alongwith the invoices and other evidences maintained by the assessee and already produced before the Assessing Officer. The Ld. CIT(A) has also pointed out that the Assessing Officer has not given any specific expense in respect of which proper bill/voucher had not been maintained by the assessee. In the instant case the Assessing Officer has rejected the books of accounts on the ground that he was not satisfied about the correctness or completeness of the accounts. But in our opinion, for rejection of the books of accounts on the ground of non-satisfaction of correctness or completeness, it is essential for the Assessing Officer to point out the specific defects. Merely increase in expenses, cannot be ground for rejection of books of accounts unless the assessee failed to explain or justify increase in expenses. The Ld. CIT(A) has made detailed verification of invoices and vouchers in respect of the expenses claimed by the Assessing Officers as excessive. The Ld. DR could not controvert the finding of the Ld. CIT(A) on justification of increase in expenses in question. In view of the aforesaid facts and circumstances, we do not find any error in the action of the Ld. CIT(A) in cancelling the rejection of books of accounts by the Assessing Officer and estimation of the profit.
4.5 Accordingly, the Grounds No. 1 to 3 of the appeal are dismissed. 4.6 The Ground No. 4 being general in nature, we are not required to adjudicate upon. 5. In the result, appeal of the Revenue is dismissed. Order is pronounced in the open court on 26th October., 2018.