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Income Tax Appellate Tribunal, Delhi Bench“G”, New Delhi
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
This is an appeal by the Department against the order dated 15.1.2014 of the learned CIT(A), Faridabad. The grounds raised in this appeal read as under:- i. “Whether on the facts and in the circumstances of the case, Ld. CIT(A) was right on fact and in law in deleting the addition of Rs. 41,66,066/- made on account of taking 7% of total contractual receipts as the assessee could not produce bills/vouchers of various expenses i.e. raw material purchases, salary, staff welfare expenses, freight and cartage during the course of assessment proceedings as well as appellate proceedings. ii. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was right on fact and in law in deleting the addition of Rs. 80,65,117/- on account of disallowance of 50% on sundry creditors outstanding as on 31.3.2009 as the assessee could not produce the creditors and nature of transactions with these creditors during the course of assessment proceedings.”
Vide ground no. 1, grievance of the assessee relates to the deletion of addition of Rs. 41,66,066/- made by the AO on account of gross profit rate. The facts, in brief are that, the assessee filed the return of income on 25.9.2009 declaring an income of Rs. 16,21,010/- which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) on 30.3.2011. Later on, the case was selected for the scrutiny. During the course of assessment proceedings, the AO noticed that the assessee was asked to furnish the complete details of PAN, complete addresses, confirmation of the creditor, the contract agreement in respect of works undertaken, details of labour payments made whether on muster roll or through contractors and proof thereof. He further observed that the assessee had submitted details of the some of the creditors and was again asked to furnish the complete details of bills/vouchers in respect of expenses claimed in the profit and loss account which were produced and verified on test check basis. The AO asked the assessee to show cause as to why his income should not be completed at 7% of the gross contract receipt for the following reasons:- i. A large number of expenses i.e. purchases of raw material, wages, salary, staff welfare, freight & cartage have been shown to be made in cash but are not fully vouched / supported by bills / invoices and no relevant bills and vouchers are available with assessee. ii. In view of the observations as above, the books of accounts of assessee and the result of net profit and gross profit etc., cannot be held to be reliable and acceptable.”
The AO was not satisfied with the explanation of the assessee and rejected the books of accounts. He computed the income by applying net profit rate of 7% on the gross contract receipts accordingly made the additions of Rs. 41,66,066/-.
Being aggrieved, the assessee carried the matter to the learned CIT(A) and submitted as under:- That 'A' is engaged in the business of construction of roads and the project sites are in remote and interior areas. Considering the nature and place of business, the 'A' requires, from time to time, some portion of its purchases in small input items and these small items of input acquired from the surrounding areas of the project sites and these inputs acquired normally from shops and establishments whose accepting cash payments only. Thus this expenditure on account of purchases has to be paid in cash. PURCHASES That 'A' made purchases of Rs. 4,18,50,931.15 from the various parties during the year. The summary of creditor's account is as under:
Opening Balance – 78,59,109.75 Purchases – 4,18,50,931.15 Payments Cheques - 3,55,18,891.15 Cash - 71,63,345.00 Closing Balance – 70,27,804.75 That the status/breakup of the creditors and purchases made during the year are as under: That the Confirmation of account of parties__ from whom purchases of Rs. a) 3,03,32,632 were made during the year, were filed during the assessment proceedings. That Purchases worth Rs. 61,68,714 were made from parties to whom total b) amount was paid by cheque only. That purchases of balance amount of Rs. 53,49,585/- were made from small c) parties out of which Rs. 49,63,345 were paid by cash and balance stood payable as on 31.03.2009.
Wages/salaries expenses That wages/salaries expenses have been incurred at the project sites situated in remote and interior areas. The labour/manpower is employed from the surrounding villages of the project sites and they are normally illiterate and poor people who don't have bank accounts and work on cash payment basis only. This expenditure on account of wages/salaries has to be paid in cash.
STAFF WELFARE That the expenses of staff welfare is incurred exclusively for tea and refreshment expenses provided to labour and other staff working at the project sites. This expenditure also involves payment of small amount to local supplier/vendor. FREIGHT AND CARTAGE That the expenses of freight and cartage has been incurred for transportation of constructions material from plant to work site through tipper trucks. As per the practice prevalent in the transporter community, truck drivers normally collect payments on delivery and in cash mode only because they have to incur expenditure on diesel, repairs, various taxes, food, etc in cash during the transit.
That the total expense of freight and cartage of Rs. 22,78,004/- has been incurred through payments made to transporters namely, Rajender Kumar and Sahun Khan. Rs. 5,41,461/- had been paid by cheque, Rs. 10,27,029/- paid by cash and Rs. 25,802/- had been deducted as TDS and balance Rs. 6,83,022/- was payable them as on 31.03.2009. The confirmation of ledger account of both these transporters were duly filed along with other confirmations during the assessment proceedings vide our covering letter Dt. 19.08.2011. That the assessment proceeding was started in the month of July, 2011 and the same were duly attended by the counsel and various details as required by the A.O., from time to time, were duly placed on record and complete vouchers/bills/invoices along with books of accounts were duly produced before the A.O.
That the assessing officer vide order sheet entry Dt. 27/12/2011 (just 4 days prior to the last date of assessment) issued a show cause reproduced as under: - "On 27.12.2011, present Sh. Manu Verma, C. A. on behalf of 'A' and made submission w.r.t. queries vide last hearing the books of accounts were produced and verified on test check basis 'A' to show cause as to why income of the 'A' should not be computed at 6% (which was subsequently considered by the A.O. at 7%) of the Gross contract receipts for the following reasons: - i. A large number of expenses i.e. purchase of raw material, wages, salary, staff welfare, freight & cartage have been shown to be made in cash but are not fully vouched/supported by bills/invoices and no relevant bills and vouchers are available with the 'A'. ii. In view of the observations as above, the books of accounts of the 'A' and the result of net profit and gross profit etc. cannot be held reliable and acceptable. Please show cause as to why the business income the 'A' should not be computed at 6% (which was subsequently considered by the A.O. at 7%) of the gross receipts. The case was adjourned to 29.12.2011." That in spite of short span of time, the 'A' duly submitted a reply to show cause on 29.12.2011 vide covering letter dt. 29.12.2011. That the assessing officer without applying the mind, passed the assessment order on 29.12.2011 and rejected the books of accounts and assessed the business income @ 7% on gross contract receipts without appreciating the facts and circumstances on record and nature of business of the 'A' and further alleged that the 'A' had agreed for this addition. This has resulted in an addition of Rs. 28,52,484/- to the returned business income. Rejected the books of accounts: That the assessing officer in her show cause notice had stated that some expenses like raw material, wages, salary, staff welfare, freight and cartage had been made in cash and they were not supported by voucher/bills/invoices. That complete vouchers/bills/invoices along with books of accounts were duly produced before the A.O. during the assessment proceedings which had been duly confirmed by the assessing officer in her order. Further in the reply to the show cause vide covering letter dt. 29.12.2011, it was restated that the books of accounts were produced but the assessing officer failed to point out any discrepancies or shortcoming or defects in the books and details submitted during the assessment proceedings. That the assessing officer has herself admitted in her assessment order that Shri Manu Verma CA attended the Assessment proceeding from time to time and filed necessary information and details. The written submissions filed along with necessary documents and explanation were examined and placed on records. That the 'A"s affidavit contravening erroneous facts and observation of Assessing Officer is attached. That complete detail of Opening and Closing stock and quantitative details about purchases & consumption were duly furnished during the assessment proceedings vide our covering letter Dt 26.08.2011 and the assessing officer has not pointed out any discrepancies/defects about the consumption or valuation of stocks. Moreover sales and purchases are duly vouched and books of accounts are duly audited by independent chartered accountants, therefore trading results should have been accepted because they are on the similar lines as per the last year and accepted by the assessing officer u/s 143(3). That detail of all major expenses including purchases were duly furnished in the assessment proceedings vide our covering letter Dt. 05.08.2011. That reason for payment in cash in respect of some small purchases of raw material and some expenses i.e. wages/salaries, staff welfare, freight and cartage incurred at the project site was duly furnished to the assessing officer vide our covering letter dt. 29.12.2011, but the assessing officer has failed to point out any defect/discrepancies in those reasons, and yet assessed business income at 7% of gross receipt. That majority of the purchases of materials and other inputs has been made by cheque only. A chart containing the details of the purchases made by the 'A' is duly enclosed. The reason for cash purchases at project site, being forced by circumstance and practical difficulties, was duly furnished during the assessment proceedings vide our covering letter Dt. 29.12.2011. We relied on the following judgments: a) That when the 'A' is engaged in such types of business which involves illiterate labour, payment of wages/salaries in cash, which is not found to be bogus, can't be the basis of rejection of books of accounts. Our view gets support from the judicial pronouncement in the case of Nisar Biri Sikka No. 1 vs. Commissioner of Income Tax decided by High Court of Allahabad cited in 174 Taxman 51. b) That in the absence of any finding as to the unacceptability of the method and irregularity of accounts kept by the 'A', the book results can't be ignored or brushed aside. Our view gets support from the judicial pronouncement in the case of Md. Umer vs. Commissioner of Income Tax, High Court of Patna, Decided on 18th November, 1974. c) That the method of accounting followed or adopted by 'A' and accepted by department for several years including acceptance in assessment u/s 143(3) and it was not established by the department that the method was such that profits could not properly be deduced, then the assessing officer was not entitled to reject the books of accounts. Our view gets support from the judicial pronouncement in the case of Commissioner of Income Tax vs. K. Sankarapandia Asari and Sons, High Court of Madras, decided on 1st July, 1980. d) That the assessing officer can't reject a system of accounting followed by 'A' uniformly and regularly over the years and which has also been accepted by the department. Our view gets support from the judicial pronouncement in the case of [A] Commissioner of Income Tax vs. Margdarshi Chit Funds (P) Ltd., High Court of Andhra Pradesh. e) That books of accounts maintained by 'A' could not be rejected because the assessing officer has failed to bring out nay positive defect in the method of accounting. Our view gets support from the judicial pronouncement in the case of J. A. Trivedi Brothers vs. Commissioner of income Tax, High Court of Madhya Pradesh. f) That the assessing officer has failed to give any facts and figure to demonstrate that the method of accounting employed by 'A' results in under-estimation of profits, the business income can't be assessed on ad-hoc basis. Our view gets support from the judicial pronouncement in the case Commissioner of Income Tax vs. Realest Builders & Services Ltd. Supreme Court of India. g) That the A.O. has not pointed out any defect or nay discrepancies in the account books maintained by the 'A'. The 'a' has been maintaining regular books of accounts, which were duly audited by an independent chartered accountant. The financial results were fully supported with vouchers/bills and the books of accounts were complete and correct in all respect. The accounts which are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. Our view gets support from the judicial pronouncement in the case of Commissioner of Income Tax vs. Paradise Holidays decided by High Court of Delhi. Considering the facts and the judicial pronouncements the learned assessing officer has erred in rejecting the books of accounts. Alternatively the assessing officer has assessed the business income @ 7% of gross receipts on ad-hoc and arbitrary basis: a) That during the year ’A' has earned GP rate of 12.30% against similar GP rate of 12.32% in A.Y. 2008-09. b) That gross profit and net profit comparison for three years is on record and was duly furnished during the assessment proceedings vide covering letter Dt 29.12.2011. c) That the assessment for A.Y. 2008-09 was finalized u/s 143(3) of the Income Tax Act and declared trading results were duly accepted by the assessing officer. That there was no reason before the A.O. to assess the business income @ d) 7% of gross receipts on ad-hoc and arbitrary basis.
That the AO erred in taw in not following the principal of consistency. This is accepted law, to be followed unless there is difference in facts. When the 'A"s gross profit and net profit have been duly accepted in the earlier year in the assessment proceedings, the AO should have followed the same or should have given the reason for applying a different rate, that the accepted net profit. That most of the contacts executed by the 'A' are from the government departments. 'A' has to enter into a tender bid in order to obtain the contract. Due to stiff competition and competitive bidding through tenders, the margin of profit is very restrictive. The qualitative controls, specification of materials, regular inspection by the customer engineers doesn't allow to earn any super or bumper profit. That the tenders are floated by the government departments after comparing each and every item of cost against the prevailing market rates and then the estimated cost of the work of the tender is announced. Tenders are accepted only on the basis of lowest rates. This also leads to very low margin of profits. That by applying N. P. rate of 7% and disallowance of 50% of the sundry creditors, the assessing officer has assumed and assessed the G.P. rate @ 29.55% and NP Rate @ 19.32@ of gross Receipts. Such type of earning is absolutely impossible in this type of business of Govt contractors. That the assessing officer has filed to refer or quote any comparable case where the net profit @ 7% had been shown or assessed. Adoption of gross profit rates of comparable businesses and additions to returned income based thereon is not valid where no details of such cases are furnished to 'A'. The assessing officer has assessed income without referring to any other comparable case. This view duly gets supports from the judicial pronouncement in the case of Joseph Thomas & Bros. vs. Commissioner of Income Tax, High Court of Kerala, decided on 6th September, 1967. That the assessing officer has failed to bring any material or nay evidence on record to justify assessment of business income @ 7% on gross receipts. ’’Assessing officer is not entitled to make a pure guess and make an assessment without reference to any evidence or nay material at all. There must be something more than bare suspicion to support the assessment. When the returns and the books of account are rejected, the assessing officer must make an estimate and to that extent he must make a guess; but he estimate must be related to some evidence or material and it must be something more than mere suspicion. Our view gets support from the judicial pronouncement in the case of Supreme Court of India Raghubar Mandal Harihar Mandal vs. The State of Bihar on 22 May, 1957. Considering the above facts and circumstances, the assessment of business income @7% of gross receipts on adhoc basis by the assessing officer is totally unjustified, illegal, baseless, and without appreciating the facts of the case, being based on surmises of Rs. 28,52,484/- made to the business income be deleted in full, and justice be rendered.”
The learned CIT(A) after considering the submissions of the assessee observed that the books of accounts of the assessee were audited and that the expenses relating to freight, salaries, staff welfare etc., had to be made to illiterate persons / transporters who could not have received any cheque payments. He also observed that as per the ratio laid down by the Hon’ble Allahabad High Court in the case of Nisar Biri Sikka No. 1 vs. CIT reported at 174 Taxman 51 (All) relied by the assessee, it has been held that in case of an assessee who was engaged in the business which involved illiterate persons / transporters, payment of wages and salary in cash, not found to be bogus, cannot be the basis for rejecting books of account. The learned CIT(A) held that the estimating profits by rejecting the books of account did not have any basis when the assessee has been adopting the same method of accounting which had never been rejected by the department. As regards to the adhoc addition by applying the 7% net profit rate, the learned CIT(A) observed that the assessee had nowhere accepted that an adhoc addition may be made. Therefore, the reasons given by the AO for rejecting the books of accounts and estimating the net profit @ 7% of turnover of the assessee lack any basis accordingly adhoc addition made by the AO was deleted.
Now the Department is in appeal. 7. The learned Sr. DR reiterated the observations made by the AO and strongly supported the assessment order passed by the AO. It was further submitted that the assessee has not given any explanation to the queries raised by the AO therefore, there was no alternative except to reject books of accounts and to determine the income by applying the net profit. 8. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that considering the nature of the business in which the assessee was engaged, there was no alternative except to make cash payments for petty expenses. It was further submitted that the assessee had shown the G.P. rate of 12.3% in comparison to the G.P. rate of 12.32% for the preceding year, a reference was made to page no. 24 of the assessee paper book. It was contended that the addition made by the AO was without any basis therefore, the learned CIT(A) was fully justified in deleting the adhoc addition made by the AO.
We have considered the submissions of both the parties and perused the relevant material on record. In the present case, it is noticed that the gross profit shown by the assessee for the year under consideration shown by the assessee at 12.30% was comparable to the gross profit rate of 12.32 % for the preceding year which has been accepted by the Department. It is also noticed that the AO while applying the net profit rate of 7% has not given any basis and even did not cite any comparable case of similar nature. It is also not the case of the AO that there was change in the method of accounting followed by the assessee for the year under consideration viz a viz the earlier years. He rejected the books of accounts simply for the reason that the payments have been made by the assessee in cash. However, he had not appreciated this explanation of the assessee that most of the persons who were engaged in the business of the assessee were mostly illiterate persons, therefore, the payments were made in cash for petty expenses like wages, transportation, freight etc. In the present case, the AO had not brought any material on record to substantiate that the expenses were not incurred by the assessee for the business purposes. Therefore, the the adhoc addition made by the AO was not justified and the learned CIT(A) rightly deleted the same. We do not see any valid ground to interfere in the findings of the learned CIT(A) on this issue.
The next issue vide ground no. 2 relates to the deletion of addition of Rs. 80,65,117/- made by the AO on account of disallowance of 50% of the sundry creditors. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had shown sundry creditors of Rs. 1,61,30,234/- in his balance-sheet as on 31.3.2009. He also observed that no documentary evidence was available with the assessee regarding the business transactions entered into with those parties. He asked the assessee to furnish the complete details of sundry creditors PAN, complete addresses, confirmation of the creditors etc. According to the AO, the assessee failed to furnish the complete confirmations from those creditors for proving the genuineness of the transaction in the books of accounts. He disallowed 50% of the outstanding amount considering the same as bogus, non-existent and non genuine. Accordingly, addition of Rs. 80,65,117/- was made.
Being aggrieved the assessee carried the matter to the learned CIT(A) and submitted as under:- "That 'A' has sundry creditors of Rs, 1,61,30,235/- in the audited balance sheet as on 31st March 2009, The 'A' has 19 creditors as on 31.03.2009. During the assessment proceedings, the assessing officer had asked to file the confirmation of sundry creditors exceeding Rs. 5,00,000/-. The 'A' has 19 creditors amounting to Rs. 1,61,30,235/-, out of which confirmation of 16 creditors representing amount of Rs. 1,56,93,995/- (more than 97%) were filed from time-to-time during the assessment proceedings (detail of confirmation filed on different date, our covering letter dated 19.08.2011, 26.08.2011, 07.09.2011, 18.11.2011 and 24.11.2011.) That the confirmation filed during the assessment proceedings contained all the requisite and complete particulars of the creditors, i.e. Name, Addresses, PAN, Details of transactions and signature. That the assessing officer has disallowed 50% of the sundry creditors on the following erroneous reasons against the facts on record : a) majority of the sundry creditors shown by the 'A' outstanding on 31.03.2009 payments have been made during F.Y. 2008-09 in cash and on documentary evidences are available with the 'A' regarding the business transaction entered into with these parties. b) That 'A' failed to furnish the complete details of sundry creditors, PAN, Complete addresses, confirmations of the creditors. c) 'A' could not produce the parties. d) Creditors of Rs. 1,61,30,234/-, 50% are bogus and non –existent and non genuine.
That the erroneous facts and observations of the AO are duly contravened through assessee’s affidavit wherein it has been stated that assessee had filed 16 confirmations out of a total of 19 sundry creditors and assessee was not asked to produce the sundry creditors. That the confirmation filed during the assessment proceedings contained all the requisite and complete particulars of the creditors, i.e. Name, Addresses, PAN, Details of transactions and signatures. The summary of creditor’s account is as under:-
Opening Balance - 78,59,109.75 Purchases - 4,18,50,931.15 Payments Cheques - 3,55,18,891.15 Cash - 71,63,345.00 Balance o/s - 70,27,804.75 That the assessing officer's observation that majority of the sundry creditors shown by the 'A' outstanding on 31.03.2009, where payments have been made during F.Y. 2008-09 in cash and no documentary evidences are available with the 'A' regarding the business transaction entered into with these parties is against the facts on record when cash paid is only Rs. 71,63,345/- out of purchase of Rs. 4,18,50,931/- and majority of sundry creditors confirmation's have been filed. The balance outstanding of the remaining 3 parties was less that Rs. 5,00,000/- individually. The total outstanding of these 3 parties is Rs. 4,36,240/- only which is just 2.70% of the total outstanding of sundry creditors. Even all cash payments made to creditors are duly evidenced by way of documentation, i.e. affirmation of transaction through confirmation filed from the side of sundry creditors. That the 'A' has duly discharged his onus by filing the confirmations from sundry creditors, with complete and desired particulars. That the 'A' was never asked by the Assessing Officer to produce the sundry creditors as alleged as mentioned by her in assessment order. There is no such noting on the order sheet as observed by the undersigned, while making inspection of assessment records post assessment. That the conclusion drawn by the assessing officer that 50% of sundry creditors are bogus, non-existent and non genuine is absolutely incorrect and without appreciating the confirmations filed and without going through the contents of the confirmations. Applying N.P. Rate of 7% and disallowance of 50% of the sundry creditors, the assessing officer has assumed and assessed the G.P. Rate @ 29.55% and NP Rate @ 19.32% of Gross Receipts. Such type of earning is absolutely impossible in the type of business of Govt. Contractors. Further alternatively when income is assessed on ad-hoc basis, by application of GP or NP rate, by rejecting the books of accounts, as done by the assessing officer, no additional disallowance can be made separately under any other head. In this regard we relied on the following judgments- Commissioner of Income Tax vs. Banwarilal Banshidhar, High Court of a) Allahabad. Commissioner of Income Tax vs. Smt. Santosh Jain, High Court of b) Punjab & Haryana. Considering the above facts and circumstances, the disallowance of 50% of sundry creditors on ad-hoc basis by the assessing officer is totally unjustified, illegal, baseless, and without appreciating the facts of the case, being based on surmises and conjectures, and hence uncalled for. We request that addition of Rs. 80,65,117/- made to the assessed income be deleted in full, and justice be rendered."
The learned CIT(A), after considering the submissions of the assessee observed that the assessment records revealed that during the course of assessment proceedings, the assessee had given the names, addresses, PAN and confirmations in respect of 97% of the amount outstanding under the head sundry creditors as on 31.3.2009 and the AO made the addition on adhoc basis even after receiving so much confirmations. The learned CIT(A) categorically stated that the assessee had produced confirmations of an amount of Rs. 1,56,93,995/- out of the total amount outstanding under the head sundry creditors of Rs. 1,61,30,235/- which represented more than 97% of the total amount. Hence, there was not an iota of truth in the AO’s averments for making an adhoc addition on account of sundry creditors. He also mentioned that the assessment record revealed that the AO never asked the assessee to produce the sundry creditors. He, therefore, deleted the adhoc addition made by the AO.
Now the Department is in appeal. 14. The learned Sr. DR strongly supported the order of the AO and further submitted that the onus was on the assessee to furnish the details as well as the confirmations of the creditors which were not furnished, therefore the AO was justified in making the addition and the learned CIT(A) was not justified in deleting the same. 15. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the confirmations, PAN in respect of the sundry creditors were furnished before the AO. All the creditors were genuine and the balance of the creditors was coming from the earlier years also. 16. We have considered the submissions of both the parties and perused the material on record. In the present case, the AO made the adhoc addition by disallowing 50% of the sundry creditors, in spite of the fact that the assessee furnished the names, addresses, PAN and confirmations of the sundry creditors. In the instant case, the learned CIT(A) categorically stated that after examining the assessment records, the assessee had furnished the confirmation for more than 97% of the amounts outstanding. Therefore, we are of the view that the adhoc addition made by the AO by disallowing 50% of the sundry creditors particularly when the purchases had been accepted, was not justified and the learned CIT(A) rightly deleted the same. We do not see any merit in this ground of department’s appeal. 17. In the result, the appeal of the Department is dismissed. . (Order pronounced in the open court on 11.07.2018.)