M/S. MEHTA CONSTRUCTION COMPANY, NEW DELHI vs. DCIT, NEW DELHI

Description / F. Y. F. Y. 2010-11 F. Y. 2009-10 F. Y.2008-09 Gross Receipts as 53,95,72,657/- 73,92,42,831/- 52,17,54,048/- per P & L Account Net Profit before 1,13,42,266/- 1,13,25,562/- 67,50,752/- interest and salary as per P & L A/c Net profit ratio as 2.10% 1.53% 1.29% per tax audit report of the relevant F. Y. Assessed u/s 143 Year under 5% 5% (3) of the IT Act, 1961 consideration

8. Assessee carried the matter before the CIT(A) but without any success.

9. At the very outset we must point out the past assessment history and the findings of the appellant authorities and the same is as under :-

A. Y. Assessee Assessing Officer CIT (A) ITAT 2007-08 0.85% 5% Confirmed Allowed Assessee’s Appeal 2008-09 0.46% 3.5% Deleted Dismissed Department’s Appeal 2009-10 1.29% 5% Deleted Dismissed Department’s appeal 2010-11 1.53% 5% Confirmed Allowed Assessee’s Appeal

10. A perusal of the above shows that in the earlier assessment years also the profit was estimated at 5 % but the same was not accepted either by the first appellate authority or by the Tribunal.

11. It is the say of the DR that during the years under consideration the Assessing Officer has specifically pointed out the errors / defects in the books of the accounts of the assessee and therefore, the past results should not be accepted.

12. We do not find any force in this contention of the DR. The assessment order of A. Y. 2010-11 is placed at pages 230 to 240 of the paper book. We find that in A. Y.

2010-11 the Assessing Officer has rejected the books of accounts for the following reasons :-

1. Unverifiable creditors/ suppliers 2. Unverifiable wage charges 3. Defects in the books of accounts 4. Non maintenance of stock register

“6. We heard the rival submissions and perused the material on record. In the present appeals there mainly two issues, one issue is regarding the rejection of book results and the other issue is regarding taxability of interest received by it due to delay in payment due to it, whether it is the business income or income from other sources. On perusal of the assessment order, it is clear that the Assessing Officer was driven to reject the book results, mainly on the ground that the profit returned on the contract receipt is very low and no stock register was maintained. It is also clear from the assessment order that the appellant had filed detailed explanation as to why there was fall in profit and produced all the books of account and vouchers for verification. The Assessing Officer simply rejected the explanation without giving any reason as to why the explanation was not accepted. Further the Assessing Officer had not pointed out any defect in the books of account maintained by the assessee. It is undisputed that the books of account were duly audited under the provisions of Section 44AB by a Chartered Accountant and the report was furnished in the prescribed form. Before rejecting the books of account, the Assessing Officer is duty-bound to give a finding as to how the correct profits cannot be deduced from the method of accounting followed by the assessee and the books of account maintained by the assessee. In this regard, we place reliance on the decision of Hon’ble Andhra Pradesh High Court in the case of CIT Vs. Margadarsi Chit Funds (P.) Ltd., 155 ITR 442 (ASSESSMENT PROCEEDINGS) wherein the Hon’ble High Court held as follows :

“…….. The assessee has, therefore, been following a consistent system of accounting and regularly employing the same system of accounting for declaring its income from year to year. It is also not in dispute that this system of accounting was not found to be defective by the ITO in the past years. All that happened was that, that ITO gave a fresh look to the matter and felt that the more appropriate system of accounting would be to declare the dividend as and when received as income and endeavoured to substitute that method of accounting for the method of accounting regularly followed by the assessee. It must be said at the outset that the choice to account for income on an acceptable basis, is that of the assessee and not of the department. This is, however not an unlimited choice, because the ITO has always the liberty to examine the system of accounting regularly employed by the assessee, to determine whether the system of accounting is defective and whether by following such system of accounting, correct profits can be deduced from the account books maintained by the assessee. If, on such scrutiny, the ITO comes to the conclusion that with reference to the method of accounting followed by the assessee, correct profits cannot be deduced, it is open to him to apply the provisions of section 145 and make the assessment in an appropriate manner. In the present case, there is no material to indicate why the ITO considers the system of accounting regularly followed by the assessee to be defective or the system of accounting followed to be such that correct profits cannot be deduced there from. The ITO’s power to substitute a system of accounting for the one followed by the assessee, flows from the provisions of section 145. It is, therefore, imperative that, before rejecting the system of accounting followed by the assessee, the ITO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee………………….”

7.In the present case, no finding was given by the Assessing Officer as to how the correct profit cannot be deduced from the books of account maintained by the assessee. The mere fact that there was lower rate of gross profit declared by the assessee as compared to the previous year would not by itself be sufficient to justify the addition. Nor does it lead to an inference that there was inflation of expenditure or suppression of receipts. The reliance for this proposition of law is placed on the decision of the Hon’ble Bombay High Court in the case of R. B. Bansilal Abirchand Spg. Wvg. Mills Vs. CIT (1970) 75 ITR 260 and on the decision of the Hon’ble Gauhati High Court in the case of Aluminium Industries (P) Ltd . Vs. CIT (1995) 80 Taxman 184. The another fact which driven the Assessing Officer to reject the books of account is non-maintenance of stock register. In our own opinion, non-maintenance of stock register is not fatal enough to reject book results. It is most appropriate in this connection to quote the observations of the Hon’ble Allahabad High Court decision in the case of Awadhesh Pratap Singh Abdul Rehman and Ors. Vs. CIT (1994) 210 ITR 406, is squarely applicable. In this case, the Hon’ble Court observed as under ;

“3. The various findings recorded by the tax authorities and that by the Tribunal have not been challenged in these proceedings. What is contended is that even if the sale or expenses may not be verifiable, yet the provisions of section 145 (2) are not attracted. Except for stating the argument, the learned counsel did not elaborate the contention to bring the point home. As noticed earlier, the account books were rejected because admittedly no stock register was maintained nor the sales were found verifiable in absence of the cash memos. The vouchers of expenses were also not forthcoming and the income returned was ridiculously low as compared to the exorbitant turnover and the extent of the business carried on by the assessee. It is difficult to catalogue the various types of defects in books the account books of an assessee which may render rejection of account books on the ground that the accounts are not complete or correct from which the correct profit cannot be deduced. Whether presence or absence of stock register is material or not, would depend upon the type of the business. It is true that absence of stock register or cash memos in a given situation may not per se lead to an inference that accounts are false or incomplete. However, where a stock register, cash memos, etc., coupled with other facts like vouchers in support of the expenses and purchases made are not forthcoming and the profits are low, it may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee. In such a situation the authorities would be justified to reject the account books under section 145 (2) and to make the assessment in the manner contemplated in these provisions. The material on which the rejection of accounts books was sustained in the case on hand was relevant material. Taking all these aspects and the material into consideration, the Tribunal has found as a fact that the claim of the assessee for acceptance of the account books was not sustainable. On the findings of fact recorded by the Tribunal, in our opinion, its order does not give rise to any question of law to direct the Tribunal to make a reference to this Court. In our opinion, the findings of the Tribunal do not suffer from any legal infirmity which are based on appreciation of facts.”

“………………. If the amounts are not paid at the proper time and interest is awarded or paid for such delay, such interest is only an accretion to the assessee’s receipts from the contracts. It is obviously attributable and incidental to the business carried on by it. It would not be correct to say, as the Tribunal has held, that this interest is totally de hors the contract business carried on by the assessee. It is well-settled that interest can be assessed under the head ‘ Income from other sources’ only if it cannot be brought within one or the other of the specific heads of charge. We find it difficult to comprehend how the interest receipts by the assessee can be treated as receipts which flow to it de hors the business which is carried on by it. In our view, the interest payable to it certainly partakes of the same character as the receipts for the payment of which it was otherwise entitled under the contract and which payment has been delayed as a result of amounts granted to the assessee under the award and treated as ‘income from other sources’………………………….

“4. It is nor brought to our notice that the decision of Orissa High Court in Govinda Chaudhary & Sons’ case (supra) was brought to this Court in appeal and has since been disposed of, which is CIT v. Govinda Chaudhary & Sons [1993] 203 ITR 881. In the said decision, it is recorded that learned counsel for the assessee conceded that interest did constitute a revenue receipt. The court however, held on the interest did constitute a revenue receipt. The court, however, held on the other question (arising in that appeal) that the said amount of interest cannot be taxed under the head “Income from other sources” which necessarily meant that it has to be taxed as a business receipt. It is true that on the question whether the interest constitutes income or not, the said decision is based upon a concession but we are of the opinion that it was a concession rightly made and is correct in law. Accordingly, we hold that interest is income and it has to be assessed as a business receipt. The question referred is accordingly answered in favour of the Revenue and against the assessee in the above terms. The appeal are disposed of accordingly. No costs.”

for ASSESSMENT YEAR 2008-09 & 4366/Del/2012 for ASSESSMENT YEAR 2009-10.

13. These appeals filed by the Revenue are directed against the order of CIT(A), dated 17.04.2012 & 19.06.2012 passed for the assessment year 2008-09 and 2009-10 respectively. The Revenue raised the following grounds of appeal in :

i. The Ld. CIT(A) erred in deleting the addition made by the A.O. amounting to Rs.1,29,91,319/- estimating the Net Profit rate of the assessee at 3.5% of the Gross turnover after rejecting the books of account of the assessee without appreciating the fact that the assessee had not produced stock register and other books of account, bills and vouchers etc. during the course of assessment proceeding and considering the fact that similar addition made by the A. O. in the immediately preceding A.Y. 2007-08 was upheld by the Ld. CIT(A). ii. The grounds of appeal are without prejudice to each other. iii. The appellant craves to add, amend or modify the grounds of appeal at any time.

14. The Revenue challenged vide these appeals the orders of the CIT(A) upholding the book results. Ld. CIT(A) vide his order passed for the assessment years 2008-09 &2009-10, allowed the appeals filed by the assessee by upholding as under :-

“I have carefully considered the facts of the case, the important aspects which immerge from the present appeal are :-

2. Non maintenance of stock register cannot be a ground for rejection of account in every case it depends upon the nature of business. 324 ITR 95 (Delhi) Commissioner of Income-Tax v. Jas Jack Elegance Exports 192 Taxman 167 (Delhi) & Commissioner of Income – Tax XII v. Poonam Rani. 3.The onus was on revenue to show that accounts were incomplete or incurred and true profits could not be deduced from the books of accounts maintained by the appellant which were also duly audited and no adverse inference was drawn by the auditors. If expenses claimed remained unexplained, A. O. could have disallowed the same without rejecting the books of accounts 325 ITR 13 (Delhi) Commissioner of Income-Tax v. Paradise Holidays. 4. The appellant has not been provided with details of comparable cases relied upon 68 ITR 796 (Kerala) Joseph Thomas and Brothers. Vs. Commissioner of Income-Tax, Kerala & 210 ITR 103 (Calcutta) Commissioner of Income – Tax V. Eastern Commercial Enterprises [relied upon 125 ITR 713 (SC) ] Kishhinchand Chellaram V. Commissioner of Income- Tax. Bombay City 1] 5. The appellant should have been provided with an opportunity to rebut before rejecting the books of accounts and estimating the profits 64 ITR 175 (AP) S. Sarabhaiah Setty and Sons. V.

Commissioner of Income – Tax, A. P & 62 ITR 528 (AP) Yakub Versey Laljee & Another V. Commissioner of Income – Tax, A. P. 6. Estimate should be based on some evidence and material 8 STC 770 (SC)_ Raghubar Mandal Harihar Mandal V. The State of Bihar 7. Best judgment assessment to be made (estimation shall have a rational nexus to the available material and the circumstances of the case) 60 ITR 239 (SC) State of Kerala C. Velukutty).

In view of the facts and circumstances of the case and judicial pronouncements relied upon by the appellant, the Assessing Officer was not justified in rejecting the books of accounts by applying section 145 (3) of the IT Act and estimating Net Profit @ 3.5%of the Gross Receipts. The addition made by the Assessing Officer to the tune of Rs.12991319/- is therefore, deleted. Appeal on these grounds is allowed.”

15. We find that the above reasoning given by ld. CIT(A) is in parity with the order passed by us in the assessee’s appeals for the assessment years 2007-08 and 2010-11, therefore, we do not intend to interfere with the orders passed by the CIT (A). Hence, the appeals filed by the Revenue i.e. & 4366/Del/2012 are dismissed.

Order pronounced in the open court on 23.10.2018.