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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’: NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI CHANDRA MOHAN GARG
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘F’: NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER Assessment Year: 2008-09 The A.C.I.T. Shri Rambir Singh Chauhan Vs. A-9/2, Shashi Garden, Circle 38(1) Near Patpar Ganj New Delhi Delhi PAN : AAEPC 6881 H [Appellant] [Respondent] Date of Hearing : 25.05.2016 Date of Pronouncement : 10.06.2016 Appellant by : Ms. Lalitha Krishnamurthy, CA Respondent by: Ms. Susan D. George, Sr. DR ORDER PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal filed by the assessee is directed against the order of the CIT(A)-XXVIII, New Delhi, dated 16/03/2012 for AY 2008-09.
The assessee has raised the following grounds of appeal:
“1. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in sustaining the addition of Rs. 4,33,533.00 by adopting the average net profit rate of last three years i.e. 10.78%.
2. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in not appreciating the fact that the appellant followed cash system of accounting in which only cash transactions are booked.
On the facts and circumstances of the case, the Ld. CIT (A) has erred in holding that the appellant had not offered any satisfactory explanation for fall in net profit rate.
On the facts and circumstances of the case, the Ld. CIT (A) has erred in not appreciating the fact that the accepted net profit rate in the case of contractors u/s 44AD of the Income tax act, 1961 in the relevant assessment year is 8% and the appellant’s net profit rate is 8.43%.
5. On the facts and circumstances of the case, the Ld. CIT (A) has erred in sustaining the net profit rate at 10.78% adopted by the Ld. A.O. in spite of the fact that; No discrepancy is pointed in the books of accounts a) No expenses are alleged to be bogus. b) No receipts are alleged to have been concealed. c)
6. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in sustaining the addition of Rs. 19.50,000.00 u/s 69 of the Income tax Act. 1961.
7. That on the facts and circumstances of the case, the authorities below have erred in not considering the revised computation of net income submitted along with statement of accounts of new business on 16.12.2010 the date fixed as per the show cause notice dated 09.12.2010.
8. On the facts and circumstances of the case, the Ld. CIT(A) has erred in not considering the explanation of the appellant that the receipts in the ICICI Bank were out of cash in hand of the new business.
On the facts and circumstances of the case, the Ld. CIT(A) has erred in not adjudicating on ground of appeal no. 3 raised which reads as under:
The addition of Rs. 19,50,000.00 is bad in law and cannot be sustained also because if at all the addition has to be made u/s 69 the same ought to be restricted to the peak balance in the ICICI Bank account of deposits during the financial year 01.04.2007 to 31.03.2008.
10. On the fact and circumstances of the case, in the alternative it is prayed that w.r.t. addition of Rs. 19,50,000.00, the addition be restricted to the peak balance.
11. That on the facts and circumstances of the case, the Ld. CIT (A) has erred in fact and law in sustaining the addition of Rs. 2,67,234.00 under the head Short & Excess expenses.”
3. Ground Nos. 1 to 5 involve common issue, being low net profit ratio.
4. Briefly stated, the facts giving rise to these grounds are that the assessee is an Electrical Contractor, doing business in the name of Chauhan & Co., as a sole proprietor from his residence. The assessee followed cash method of accounting. The AO, during the course of assessment proceedings observed that during the year under consideration, he got electrical contract work for government owned ITDC Hotels viz. Ashok Hotel, Samrat Hotel and Janpath Hotel. The assessee filed original return of income declaring an amount of Rs.14,49,540/- including profit of Rs.15,49,540/- from Chauhan & Co. In addition to this contract work, assessee had a small trading business in electrical parts. The AO added this amount to the income of the assessee by observing that there was a considerable reduction in N.P. in A.Y. 2008-09, as compared to A. Y. 2007-08. However assessee had not provided any justification regarding reduction in N.P. during the period under consideration. In the absence of any satisfactory explanation, average rate of N.P. for the last three years, which came to 10.87% was applied to the gross receipts of Rs.1,83,70,885.00 and an addition of Rs.4,33,533/ was made to the returned income of the assessee on account of low net profit rate. Aggrieved, the assessee went in appeal before the ld. CIT(A) who sustained the addition made by the AO. Now the assessee is further aggrieve d and has come in appeal before the Tribunal.
Before us, the ld. AR reiterated the submissions made before the authorities and relied on the written synopsis filed on record and AO was incorrect for the following reasons:
(i) Under Section 44AD of IT Act for assessment of contracts 8% is an acceptable net profit rate. Net profit rate of assessee for the year was 8.3%.
(ii) AO has not doubted the expenses or pointed any discrepancy in the books.
(iii) The AO did not resort to section 145 of the Act.
(iv) AO is wrong in stating that no explanation was offered because of which she resorted to average net profit rate of three years. Last para of letter dated 16.12.2010 (pages 24 to 26) gives the reason for the fall in NP:
“The reason for fall in N. P. is attributable to the fact that the assessee maintains account on cash system. In this system it is possible that expenses have been incurred on a particular work order but the payment has not been received till 31.03.2008 and is received after 31.032008 thus falling into the subsequent year. Further also the because of cut throat competition, the assessee had to cut down the margin of profit.”
The ld. AR submitted that the bonafides of the assessee can be proved by the fact that in the subsequent years the net profit ratio was much more and this year was only an exception which is clear from the chart given below:
Assessment Year Accounting year NP Ratio 2009-10 31.03.2009 10.19% 2010-11 31.03.2010 9.98% 2011-12 31.03.2011 10.59% The ld. AR contended that without prejudice to above, AO cannot resort to estimation of GP/NP unless: (i) Some defect is pointed out in the books. (ii) Books of account are rejected. (iii) Bogus expenditure is pointed out in the books of account.
The ld. AR placed reliance on the following case laws: (i) 256 ITR 243, 244 Gotan lime Khanij Udyog (Raj) (ii) 332 ITR 540 Bindal Apparels. (iii) 10 taxmann.com 74 Vishwanath Prasad (Jabalpur). In view of the above the ld. AR prayed that the addition of Rs.4,33,533/- was unsustainable on facts and law.
Per contra, the ld. DR relied on the orders of the authorities below and submitted that the ld. CIT(A) was justified in dismissing the ground of appeal raised by the assessee by taking average rate of net profit for the last three years and making the addition.
We have heard the rival submissions and have perused the relevant material on record. After considering the overall facts and legal position of this issue, we have found that the A.O. has nowhere rejected the books of account of the assessee either impliedly or expressly. Therefore, without pointing out any defects in the book results of the assessee and without rejecting the books of account by invoking the provisions of section 145 of the Act, it is not permissible for the AO to proceed to estimate the N.P. rate @ 10.78 of the turnover without any basis. The AO has not pointed out any defect or deficiency in the claim of expenditure nor any expenditure has been held as bogus by the AO. From the relevant operative para 2 of the assessment order, we note that the AO asked financial results of the last three years and proceeded to make addition in this regard without confronting the issue to the assessee which is not a justified approach. From the impugned order of the ld. CIT(A), we observe that the ld. CIT(A) noted from the assessee’s explanation vide order dated 16.12.2010 as follows: “The reason for fall in N.P. is attributable to the fact that the assessee maintains accounts on cash system. In this system it is possible that expenses have been incurred on a particular work order but the payment has not been 31.3.2008 and is received after 31.3.2008 thus falling into the subsequent year. Further also, because of cut throat competition, the assessee had to cut down the margin of profit.”
9. In view of the above explanation of the assessee for reduction of N.P. rate is that the assessee follows cash system of accounting, wherein it is possible that expenses have been incurred on a particular work but the payment has not been received till 31.3.2008 and actually received and accounted as revenue after 31.3.2008 during the next financial period which resulted in to increase in N.P. rate for A.Y 2009-10 to 10.19% of turnover. The assessee also explained that he operates from his residence and due to cut throat competition, the N.P. reduced during the relevant period, above explanation has not been controverted by the AO or by the co and thus their findings are not sustainable. On the basis of the foregoing discussion, we are satisfied that the explanation given by the assessee to justify the fall in N.P. rate, as noted above, is acceptable and we are inclined to accept the same. Consequently, addition made by the AO and upheld by the ld. CIT(A) on account of N.P. rate is not sustainable and we direct the AO to delete the same. Accordingly
Ground No. 1 of the assessee is allowed.
Ground Nos. 6 to 9 pertains to the aaddition of Rs.19,50,000/- u/s 69 of IT Act.
Brief facts relating to this ground are that, as mentioned above assessee was running besides the business of electrical contractor, a trading business in electrical parts. The ld. AR submitted that through inadvertence, the results of the trading business was not reflected in the original computation of income. The assessee was 12th class pass and from being a small electrician working under other contractors, rose to be an independent electrical contractor. But for all purposes, was an uneducated person, not conversant with income tax law and accountancy and had to rely on accountants to prepare his books of account. Hence he was under the bonafide belief that the original income tax return would have included his income from both electrical contract with ITDC and trading in electrical parts. The AO asked the assessee to show cause on 09.12.2010 to explain the cash deposit of Rs. 19,50,000/- in ICICI bank failing which, it would be added as income from undisclosed sources. In reply, the assessee explained that the source of cash deposits were from the trading business of the assessee and for this purpose assessee prepared a statement of income 9
27 of the assessee’s paper book, duly supported by vouchers, bank statement, placed at pages 28 to 29 of the paper book and bank/cash book on 16.12.2010 by letter of even date, pages 24 to 25 of the assessee’s paper book. The AO completed the assessment without considering such explanation. This was objected to by the assessee vide letter dated 16.12.2010, placed at pages 24 to 25, which reads as under:
“The other business is new and the assessee inadvertently without any malafide intention forgot to include the profit/ loss of this business in his income tax return. Accordingly the assessee is filing a revised computation of net income including therein the profit from the trading in electrical parts. The additional tax liability on this amount has been paid off. Photocopy of the deposit slip for Rs.90,620.00 is enclosed. The aforesaid information has been given by the assessee suo-moto and before any detection by the department. The deposit of Rs./9,50,000.00 into the ICICI Bank bearing no. 629701502290 is out of this business. The deposits are out of cash in hand in the books.”
The ld. AR further contended that the assessee having explained the source of deposit cash of Rs. 19,50,000/- into the ICICI Bank to be out of cash in hand in the books, the addition was unsustainable on facts and law without examining the supporting vouchers produced by 10
16.12.2010 and in remand proceeding dated 09.01.2012. No questions were asked by the AO and these letters along with enclosures were just put on record. Appellant was under bonafide belief as he was not familiar with tax laws that the part time accountant had taken such trading income also. The fact that this was not taken into account was discovered during assessment and assessee filed revised computation (pages 19 to 22 of assessee’s paper book) before assessment was completed including LTGC of Rs.13,303/-, bank interest Rs.12,528/- and trading business profit Rs.169,997/- and income was revised to Rs. 16,45,370/- and additional tax of 90,620/- was paid. The net profit from this was Rs.1,69,997/- which was inadvertently not incorporated in the computation of income. The ld. AR contended that addition is unsustainable unless AO brings adverse material on record to controvert the explanation of the assessee. In administrative law, rules of natural justice are foundational to prevent miscarriage of justice and to allow for fairness of action. The ld. AR submitted that the assessee alongwith accountant had appeared on 16.12.2010 alongwith with the books of account which the AO did not examine. Before the AO, in remand proceedings, assessee had given a chart explaining the source of the deposit of cash and again before Id.
CIT(A), the assessee produced books of account and ICICI Bank statement. Even the affidavits filed were not considered by AO/CIT(A). Therefore, the ld. AR submitted that the addition of Rs.19,50,000/- was bad in law and cannot be sustained. In the alternative, the ld. AR submitted that without prejudice to above the addition ought to have been restricted to the peak balance of the deposits made by the assessee in the previous year in ICICI Bank account. On perusal of the bank account, the peak balance would be Rs.7,81,459/- as under:
Peak balance as on 12.01.2008 Rs.13,51,951.00 Less: Opening Balance as on 1.4.2007 Rs.5,50,492.00 Balance peak balance of cash deposited in the Bank in the previous year Rs.7,81,459.00
We have heard the arguments of both the sides and carefully perused the relevant material placed on record before us. Apropos these grounds, the ld. AR contended that the ld. CIT(A) ld. CIT(A) has erred in sustaining the addition of Rs. 19,50,000/- u/s 69 of the Act and the authorities below have erred in not considering the revised computation of net income submitted alongwith the statement of accounts of new business on 16.12.20110 the date fixed as per show cause notice dated 9.12.2010. The ld. AR also pointed out that the ld.
CIT(A) has also erred in not considering the explanation of the assessee that the receipts in ICICI Bank were out of cash in hand of new business of the assessee. Alternatively, the ld. AR contended that the addition can only be made to peak balance.
The ld. DR supported the action of the AO. However, he pointed out that if addition is restricted to peak balance, then department has not serious objection to that. On careful consideration of the above, we have no hesitation to hold that the assessee could not establish that the cash deposits to ICICI Bank was from the cash in hand of new business of the assessee and no details of cash book and cash flow has been furnished. However, we are in agreement with the contention of the ld. AR and agreed by the ld. DR that in these set of facts and circumstances of the case, only peak balance can be taken for making addition and we order accordingly. Consequently, Ground No. 2 of the assessee is allowed on alternative prayer of the assessee and thus the AO is directed to take peak balance of deposits for making addition u/s 69 of the Act.
Last ground No. 10 relates to the disallowance of short and excess expenses amounting to Rs.2,67,234/-.
Before us, the ld. AR submitted that the term short and excess means any amount small / less received or paid in the day to day course of business which is debited / credited under this account, copy of short and excess account has been placed at pages 30 to 48 of the paper book. It is amount that has not been received by the assessee in his bank account even though it is appearing in 16A as part of the total amount deemed to have been paid to the assessee. Copy of 16A placed at pages 56 to 61 of the paper book, the major entries of which are tabulated at page 13 of the paper book. The corresponding bank entries for these items were appearing in the bank statement at pages 62 to 63 of the paper book. The assessee had therefore rightly debited the said amounts in the short and excess account. The ld. AR submitted that in cash system of accounting, only cash receipts or cash disbursement would appear. Where accounts are maintained on cash basis, receipt of money or monies worth would be the determining factor. The follows cash system of accounting and hence income for tax purposes would be actual receipt flowing into the bank account. Hence the ld. AR prayed that disallowance of short and excess of Rs.2,67,233/- which was not received by the assessee cannot constitute the income of the assessee.
The ld. DR supported the orders of the authorities below and contended that the assessee could not substantiate the exact nature of expenses claimed. Short and excess account is generally meant for small adjustments, therefore, amount of Rs. 2,87,234/- was righty disallowed and added to the income of the assessee.
On careful consideration of the above rival submissions, we have noted that the assessee operates electrical repairing and maintenance business from his residence and he follows cash system of accounts. In these circumstances, we are in agreement with the contention of the ld. AR, also noted by the ld. CIT(A) at page 20 of the impugned order, that any stage of assessment proceedings the assessee was note asked to substantiate the debit of Rs. 2,67,234/- in the profit and loss account under the head short and excess The ld. CIT(A) also observed that the term short and excess suggest, any amount small or big, less received or paid in the day to day course of business may be debited/credited under this account. However, the ld. CIT(A) did not agree with factual position placed by the ld. AR during the appellate proceedings and confirmed the addition. But at the same 15
time, from careful reading of the first appellate order, we clearly observe that the ld. CIT(A) also not raised any query in this regard nor made any investigation or verification about this claim of the assessee. Hence, in our considered opinion, this issue requires proper examination and verification at the end of the AO and thus the issue is restored to the file of the AO for fresh adjudication after affording the assessee due opportunity of being heard. Consequently, Ground No. 10 of the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee stands partly allowed in the manner as indicated above.
The order is pronounced in the open court on 10.06.2016.