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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’: NEW DELHI
Before: SHRI INTURI RAMA RAO & SHRI SUDHANSHU SRIVASTAVA
ORDER PER INTURI RAMA RAO, A.M.: These are the appeals filed by the assessee-company as well as by the Revenue. The appeals in for A.Y. 2007-08 and 474/Del/2015 for A.Y. 2010-11 are filed by the assessee company. The appeals 2 in ITA Nos. 2561/Del/2012 for A.Y. 2008-09 and 4366/Del/2012 for A.Y. 2009- 10 are filed by the Revenue. Since in all the four appeals the only issue involved is rejection of book results, they are being disposed of by this consolidated order. ITA Nos. 3967/Del/2010 for AY 2007-08 & 474/Del/2015 for AY 2010-11.
First we shall take up the appeals filed by the assessee. These appeals filed by the assessee are directed against the orders of CIT(A) dated 31.03.2010 and 07.12.2014 passed for the assessment years 2007-08 and 2010-11 respectively. The assessee raised the following grounds of appeal in ITA No. 3967/Del/2010: i. Learned Income-tax Officer is erroneous in law and on the facts of the case because it is the bounden duty of the Assessing Officer to give proper opportunity to the assessee to rebut the comparative cases relied (even not cited any particulars) by the Income-tax Officer before he can have the option to estimate the gross profit. Again, it is comparative instance that alone can be the foundation of such estimate in case the accounts are really found to be unreliable and requiring to be rejected. O\ ii. On the facts and circumstances of the case Ld. CIT(A) is wrong in upholding the view of the Income-tax Officer in invoking the provision of the proviso to Section 145(3) which is not on the statute book. iii. Learned Income-tax Officer is erroneous in law and on the facts of the case in rejecting the book results under section 145 and estimating the income at 5 percent of gross receipts of the appellant which is calculated at Rs. 99,66,385/-. iv. Learned Income-tax Officer ought to have accepted income returned by the appellant as there is no case to prove that accounts of the appellant accounts of the appellant are not correct and complete and got its accounts audited under the law. v. Learned Income-tax officer is erroneous in law in concluding that book results of the appellant are verifiable & unvouched. vi. Learned Income-tax Officer was not appreciative in not accepting system of purchasing & user of consumable items for contract works on the basis of prevailing market rates based on proper negotiations by the appellant.
3 vii. Learned Income-tax Officer wrongly inferred that opening work-in- progress was not properly stated. viii. That the different observation of Learned Income-tax Officer shows that his foundations for the conclusion are erroneous and the estimate made by him is without related to some evidence or material. ix. That at no point of time before estimating the income of the assessee the Ld. ITO had given opportunity of meeting the case of the revenue. x. Learned Commissioner of Income-tax (Appeals) is not justified in law in concurring with the findings of Learned Income-tax officer. xi. Learned Commissioner of income-tax (Appeals) erred in law in not appreciating that the facts of the case did not warrant for application of provisions of section 145 and estimating the income of the appellant. xii. Learned Commissioner of Income-tax (Appeals) erred in law in upholding the addition of Rs. 2,93,81,144/- by the Learned Income-tax officer on account of interest received which is nothing but compensation for delayed payments of pending amounts due for the contract work executed by the assessee. xiii. Appellant prays the Hon’ble Tribunal to quash the order passed by the learned Income-tax Officer as bad in law and may direct the Assessing Officer to accept the income returned.
For the sake of clarity and convenience, the facts in for A.Y. 2007-08 are stated hereunder: 3.1 The assessee is a partnership firm. It is engaged in the business of civil construction, undertaking contracts for road building from Government. The return of income for the assessment year 2007-08 was filed on 14.11.2007 disclosing total income for Rs. 6,75,927/-. Subsequently, the case was taken up for scrutiny assessment under Section 143(1) of the Income-tax Act, 1961 (for short “the Act”). The assessment was completed at a total income of Rs. 3,78,95,211/- by rejecting the book results, estimating the profit @ 5% of the gross receipts vide order dated 30th December, 2009, passed under Section 143(3) of the Act. During the course of assessment proceedings, the Assessing Officer noticed that appellant offered net profit @ 0.88% of the gross turnover 4 after including the interest receipts of Rs. 2,93,81,144/- on delayed receipts of contract receipts pertaining to the earlier years. The Assessing Officer observed that if the interest component of Rs. 2,93,81,144/- is excluded from contract receipts, it results in negative profits @ 11.37% of the contract receipts. Therefore, he concluded that the book results cannot be accepted and estimated the profit @ 5% of the contract receipts and he taxed the interest receipts on account of delayed receipts of contract receipts of Rs. 2,93,81,144/-. Being aggrieved by this order, an appeal was filed before the CIT(A) who vide order dated 31st March, 2010 confirmed the rejection of book results vide para 7 of his order, which reads as under: “7. In the assessment order, the A.O. has pointed out that the appellant has shown net profit of 0.88% only and if the extraordinary items are excluded, there is a net loss of 11.37%. Clearly, the N.P. rate shown is extraordinarily low and a heavy burden of proof lay on the assessee to justify such a low rate of profit. However, the assessee has not produced the required documents and details. The appellant has failed to produce the books of account. In view of these facts, the burden of proof cannot be said to be discharged by the assessee. The book results shown remain unsubstantiated. The Assessing Officer’s estimating of income is justified in view of the assessee’s repeated failure to produce the Books of a/c and the details and records asked for, by the A.O.” Vide para 14 of his order, the CIT(A) upheld the taxing interest received on account of delay in the receipt of the contract receipts as income from other sources. Being aggrieved, the appellant is before us.
Learned counsel for the assessee-company submitted that the assessee had filed all the information as required by the Assessing Officer. The assessee- company also filed the explanation as to why there was a fall in the profit 5 returned by the assessee company. All the books of account had been produced before the Assessing Officer for verification and he did not point out any defects in the books of account maintained by the assessee-company. He further submitted that mere low profits and non-maintenance of stock register cannot be the reason for the rejection of the book results. He further submitted that the Assessing Officer had not given any material in support of estimating the profit @ 5% of the contract receipts and therefore, he prayed the assessment made by the Assessing Officer should be quashed as it is passed in violation the principles of natural justice. With regard to the interest received due to delay in payment due to it, he submitted that the interest partake the same character as contract receipts and therefore should be treated as a business receipt. In support of this proposition, he relied on the following decisions of the Hon’ble Supreme Court and Hon’ble High Courts: i. CIT Vs. Govind Choudhary & Sons, 203 ITR 881 (SC) ii. Nirman Industries Ltc. Vs. DCIT, 283 ITR 402(Guj.) iii. Konkan Barge Builders (P) Ltd. Vs. ITO and Anr, 297 ITR 39(Bom.) iv. CIT Vs. Bhansali Engg. Polymars Ltd., 306 ITR 194(Bom.) v. Phatela Cotgin Pvt. Ltd. Vs. CIT, 303 ITR 411 (P&H) 5. On the other hand, the learned DR relied on the orders of the authorities below.
We heard the rival submissions and perused the material on record. In the present appeals there are 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 6 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 assesee 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 (AP) 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, the 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 7 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…………….”
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 8 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 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 factors 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 account 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.”
9 8. The stock register may be important for manufacturing industries but when it comes to the case of contractor, it may not be important as the entire material purchased, might have been consumed and charged to profit and loss accountant and the closing stock working progress has been shown by the assessee. In the circumstances, in our opinion, the non-maintenance of stock register alone cannot enable the Assessing Officer to reject the books of account. A coordinate bench of ITAT, Ahmedabad, in the case of DCIT Vs. Paras Dyeing and Printing Mills Pvt. Ltd. , (2010) 4 ITR (Trib.) (Ahd.) after reviewing the entire case-laws, held that the low profit cannot be the reason for rejection of the book results. The Hon’ble Gujarat High Court in the case of CIT Vs. Vikram Plastic, 239 ITR 161 held that no specific discrepancies or defects in the books of account of the assessee has been pointed out, nor any material was brought to establish that the purchases and expenses had been inflated or the sales had been suppressed and in the absence of any such material or finding given, there was no justification in invoking the provisions of Section 145(2) of the Act. Thus, having regard to the ratio laid down in the cases cited supra, we are of the considered opinion that in the present case also the Assessing Officer was not justified in rejecting the book results without pointing any specific defects in the books of account. Therefore, this ground of appeal filed by the assessee is allowed.
9. The next ground of appeal relates to the taxing of interest of Rs. 2,93,81,144/- received due to late payment of amount due to it. Indisputably, the 10 interest amount was received by the assessee on account of delay in payment of money due to it by its contractee. This issue is no longer res integra. The Hon’ble Supreme Court in the case of CIT Vs. Govinda Choudhury & Sons, 203 ITR 881 held as follows: “…….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 certain disputes between the parties. It cannot be separated from the other amounts granted to the assessee under the award and treated as 'income from other sources'………..”
10. Subsequently, the Hon’ble Apex Court in the case of CIT Vs. B.N. Agarwala & Co., 259 ITR 754, following the same ratio held as under: “ 4. It is now brought to our notice that the decision of the Orissa High Court in Govinda Choudhary & Sons’ case (supra) was brought to this Court in appeal and has since been disposed of, which is CIT v. Govinda Choudhary & 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 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 11 against the assessee in the above terms. The appeals are disposed of accordingly. No costs.”
Therefore, respectfully following the ratio laid down in the cases cited supra, we hold that the interest received by the assessee on account of delay in the payment of money due to it cannot be taxed separately but only as an income from business. Accordingly, this ground of appeal
filed by the assessee is allowed in its favour.
12. In the result, the appeals filed by the assessee are allowed in full. for AY 2008-09 & 4366/Del/2012 for AY 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 years 2008- 09 and 2009-10 respectively. The Revenue raised the following grounds of appeal in ITA No. 2561/Del/2012: 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 CIT(A) upholding the book results. Ld. CIT(A) vide his order passed for the assessment 12 years 2008-09 & 2009-10, allowed the appeals filed by the assessee by holding as under: “I have carefully considered the facts of the case, the important aspects which immerge from the present appeal are:-
1. 1. The Method of accounting has been accepted for several years on same set of facts. Reliance is placed on 294 ITR 655 (Gauhati) MKB (Asia) P . Ltd, v. Commissioner of Income-Tax 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 incorrect 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 auditor. 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)] Kishinchand Chellaram. V. Commissioner of Income- Tax, Bombay City 11.
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 13 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.
In the result the appeals filed by the assessee i.e. ITA Nos. 3967/Del/2010 & 474/Del/2015 are allowed and the appeals filed by the Revenue i.e. ITA Nos. 2561/Del/2012 & 4366/Del/2012 are dismissed. The decision is pronounced in the open court on 16th October, 2015.