VISHAL BUILDERS, RAIPUR,RAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-3(1), RAIPUR, RAIPUR
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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI RAVISH SOOD & SHRI ARUN KHODPIA
आदेश / ORDER PER RAVISH SOOD, JM: The present appeal filed by the assessee firm is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), dated 02.06.2023, which in turn arises from the orders passed by the A.O. u/s. 143(3) of the Income-tax Act, 1961 (for short ‘Act’), dated 15.02.2016 for A.Y. 2013-14. The assessee firm has assailed the impugned order on the following grounds of appeal before us:
“1. Ld. CIT(A) erred in sustaining addition of Rs.46,79,522/- on account of Net profit of business for the year due to rejecting books of accounts. 2. The impugned addition made by the Ld. A.O., is bad in law, illegal, unjustified, contrary to facts & law and based upon recording of incorrect facts and finding, in violation of principles of natural justice and the same should have been quashed by the Ld. CIT(Appeals). 3. The appellant reserves the right to amend, modify or add any of the ground/s of appeal.”
Succinctly stated, the assessee firm, which is engaged in the business of construction, had e-filed its return of income for A.Y.2013-14 on 26.02.2014, declaring an income of Rs.21,65,940/-. Subsequently, the case of the assessee firm was selected for scrutiny assessment u/s. 143(2) of the Act.
During the course of assessment proceedings, it was observed by the A.O that the net profit (NP) rate of the assessee firm had witnessed a decline in comparison to the preceding year, as under:
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Particulars A.Y.2013-14 A.Y.2012-13 A.Y.2011-12 Turnover 12,33,24,806/- 18,57,88,694/- 14,14,91,868/- Gross profit 2,05,37,428/- 2,01,13,218/- 1,49,54,711/- Gross profit ratio 16.65% 10.83% 10.57% Net profit 21,60,761/- 37,85,761/- 29,18,569 Net profit ratio 1.75% 2.04% 2.06%
The assessee firm, on being queried about the fall in the NP rate, submitted that the same was for the reason that the expenses always witnessed an increase every year on account of inflation and rise in prices of materials and cost of services. Also, it was stated that the fall in the NP rate was attributable to an increase in bank charges and interest on secured loans. Further, the assessee justified its book results in comparison to the preceding year by claiming that there was an increase in vehicle expenses, depreciation, and insurance expenses a/w. increase in salary. However, the aforesaid explanation claim of the assessee firm did not find favor with the A.O.
The A.O., in order to verify the book results of the assessee firm, called for its books of accounts. In compliance, the assessee produced books of accounts, but as observed by the A.O., he failed to produce some bills and vouchers of labor contract payments and muster roll of labor payments for the period January 2013 to March 2013. Accordingly, the A.O. afforded the assessee another opportunity to produce complete details for necessary verification. On the next date, the assessee firm produced books of account but, once again, failed to produce the complete muster
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roll of labor payments for the reason that they were kept at a faraway site. The A.O. observed that a perusal of the records of the assessee firm revealed that it had made some payments to labor contractors in cash and had failed to produce supporting vouchers and bills for necessary verification. As the assessee failed to come forth with any explanation regarding the aforesaid abnormalities in its books of accounts, the A.O. held a conviction that it had not properly maintained its books of accounts and rejected the same u/s. 145(3) of the Act. Backed by the aforesaid facts, the A.O drawing support from the fact that similarly placed assessees engaged in the same line of business were maintaining their NP rate between 6% to 8% during the year under consideration; thus, on an estimated basis adopted the NP rate in the case of the assessee at 7% (i.e. average of 6 % to 8%). Accordingly, the A.O. vide his order passed u/s. 143(3) dated 15.02.2016 after, inter alia, determining the income of the assessee firm from its business of civil contractor @7% of its gross receipt of Rs. 12.33 crore (approx.) assessed its income at Rs.1,01,01,235/-.
Aggrieved the assessee carried the matter in appeal before the CIT(Appeals). Observing that the assessee firm had partly produced vouchers, wherein certain vouchers revealed cash payments coupled with the fact that it had not produced muster roll for part of the year, the CIT(Appeals) approved the rejection of the books of account by the A.O u/s. 145(3) of the Act. Referring to the fact that the assessee firm was visited with a survey u/s. 133A of the Act in the preceding year, i.e., A.Y.2015-16, wherein it had surrendered additional income towards an undisclosed profit of Rs.3.04 crore (approx.), the CIT(Appeals) observed that the NP rate for
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A.Y.2015-16 after considering the amount surrendered by the assessee worked out at 4.36%. Considering the fact that the NP rate in the case of the assessee firm for A.Y 2015-16 worked out at 4.36% in A.Y.2015-16, the CIT(Appeals) was of the view that adopting the same rate for the year under consideration would, in all fairness, meet the interest of justice and, thus, scaled down the NP rate from 7% (as adopted by the A.O) to 4.36%. For the sake of clarity, the relevant observations of the CIT(Appeals) are culled out as follows:
“4.2.1 I have carefully gone through the submission of the Appellant. The only issue in this appeal is rejection of books of accounts and applying NP ratio of 7%. Assessee is a civil construction contractor. During assessment proceedings AO has asked to produce bills and vouchers of all expenses and also produce muster roll of labour at site. Assessee partly produced vouchers and some vouchers payment was made in cash. Some muster rolls were also not produced. For these reasons AO has rightly rejected books of accounts u/s.145 of IT Act. There was a survey u/s 133A in FY 14-15 relevant to AY 15-16 and stock difference was found. During survey stock difference of Rs 3,04,15,5081- was surrendered as additional income in the form of undisclosed profit. Since assessee could not produce all vouchers and muster roll books were rejected. It is well known fact that suppression of income is prevalent in case of civil contractors generally and for this reason during survey amount of Rs 3.04 Cr was surrendered as undisclosed income which made the NP for AY15-16 of 4.36 %. Since survey year is very close to AY under appeal it may be safely presumed that the assessee may be having same GP and NP ration during this year also like survey year at 4.36%. Adopting NP of 4.36 % will meet justice as this is lower than 7 % adopted by AO and higher than offered by assessee at 1.75%. Considering the facts NP of 4.36% is held as genuine NP and difference of 2.64% NP is deleted.”
The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.
We have heard the ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as
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well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions.
As stated by the Ld. AR, and rightly so, we find that though the rejection of books of accounts of the assessee firm was primarily based on three reasons, viz. (i) that the assessee did not produce certain bills/vouchers of labor contract payments; (ii) certain payments made to the labor contractors were in cash; and (iii) that the assessee had failed to produce the muster roll of labor payments for the period January 2013 to March 2013; but its GP rate for the year under consideration i.e. 16.65% is substantially more as against that of the immediately two preceding years. Although, it is an admitted fact that the NP rate of the assessee firm had scaled down to 1.75% in comparison to the immediate two preceding years, i.e., A.Y.2012-13 @ 2.04% and A.Y. 2011-12: 2.06%, the same, however, cannot be attributed to the labor expenses for the reason that gross profit rate for the year under consideration had remained substantially more as in comparison to the said two preceding years. Apart from that, we find substance in the claim of the Ld. AR that the labor expenses during the year under consideration were substantially on the lower side, i.e., 10.66% of its gross receipt as in comparison to the two immediately preceding years, as under:
Particular A.Y.2011-12 (%) A.Y.2012-13 (%) A.Y.2013-14 (%) To labour 2,10,98,519 14.91% 2,43,14,260 13.09% 1,31,47,467 10.66% payment
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At this stage, we may herein observe that neither of the lower authorities had drawn any adverse inferences as regards the gross profit rate of the assessee for the year under consideration.
Apropos the comparative fall in the NP rate of the assessee firm during the year under consideration, the Ld. AR had drawn our attention to a comparative “chart” of its profit and loss account for the year under consideration and immediately two preceding years, i.e., A.Y.2011-12 and A.Y.2012-13, Page 37 of APB. As stated by the Ld. AR, and rightly so, we find that substantial increase in certain expenses, viz. bank commission and charges, bank interest, depreciation, interest on secured loans, and salary expenses, had primarily attributed to the fall in the NP rate of the assessee for the year under consideration. For the sake of clarity, the “chart” depicting the aforesaid details is culled out as under (relevant extract) (Page 37 of APB) :
Particular A.Y.2011-12 (%) A.Y.2012-13 (%) A.Y.2013-14 (%) To Bank 6,18,508 0.44% 8,48,806 0.46% 16,39,861 1.33% commission and charges To Bank 21,05,683 1.49% 32,63,611 1.76% 45,03,611 3.65% Interest
To 16,32,474 1.15% 26,44,545 1.42% 35,02,959 2.84% depreciation To Interest 4,86,121 0.34% 6,68,296 0.36% 13,06,644 1.06% on secured loan
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To salary 14,25,700 1.01% 24,03,790 1.29% 36,38,417 2.95% expenses
Considering the aforesaid facts, we find substance in the claim of the Ld. AR that the comparative analysis of the financial statements of the assessee firm for the year under consideration in the backdrop of those for the last two preceding years, a fall in NP rate can by no means be attributed to the labor expenses claimed as a deduction by the assessee firm during the year under consideration, which, as observed by us hereinabove, are substantially on the lower side as in comparison to the preceding years. Also, there is substance in the claim of the Ld. AR that a certain rise in the expenses debited by the assessee firm in its profit and loss account had resulted in a lower NP rate for the year in question.
Apropos the observation of the A.O. that the books of account of the assessee firm were liable to be rejected u/s. 145(3) of the Act for the reason that it had failed to produce certain vouchers of labor contract payment, and also certain payments made to labor contractors in cash were not available, in our considered view, are generalized observations without there being any whisper of the specific instances of any such infirmity. We say so for the reason that neither of the lower authorities had pointed out any specific instance where either the assessee’s claim for deduction of labor contract expenses was not supported by the corresponding bills/vouchers or where the payment made to labor contractors in cash was not verifiable to his satisfaction. In our view, such generalized observation of the A.O. could not have justifiably formed a basis for rejecting the duly audited books of
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account of the assessee u/s. 145(3) of the Act. Our aforesaid view is fortified by the order of the Tribunal in the case of ACIT Vs. Sanjay Agrawal, ITA No.82/RPR/2018 dated 09.06.2022. The Tribunal, in its aforesaid order, had observed that though the A.O had rejected books of accounts of the assessee for the reason that he had failed to produce all vouchers for verification before him, but in the absence of pointing out any specific defect with respect to a single instance of any such claim of expenditure of the assessee his unsubstantiated observation could not be approved. Accordingly, as the assessee in the present case before us had, while framing the assessment, failed to point out any specific defect either in the books of accounts or in the bills and vouchers of the assessee firm, the same would by no means justify the rejection of its books of account. For clarity, the relevant observations of the Tribunal in the case of ACIT Vs. Sanjay Agarwal (supra) are culled out as under:
“6. We have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the ld. AR in order to drive home his contentions. On a perusal of the assessment order, it transpires, that the AO had rejected the books of account of the assessee, for the reason that not only the assessee in the course of the assessment proceedings had failed to produce all the vouchers for verification before him, but also by stating that the bills/vouchers supporting its claim for deduction of certain administrative expenses, viz. printing and stationary, office misc. expenses, repair and maintenance expenses, transport and hire charges may not match the decorum and level of presentation to which the AO may be accustomed, had thus admitted to lack of maintenance of proper records. On appeal the CIT(appeals) though concurred with the assessee that the AO had rejected the books of accounts of the assessee without pointing out any specific defect in its books of accounts, but despite so observing he had proceeded with the estimation of its income and by drawing support from the NP rates of the assessee for AY 2011-12 and AY 2014-15, held a conviction that going by the rule of consistency the profit rate for the year under consideration could safely be taken @7% subject to a further deduction of depreciation, finance charges and partners remuneration and interest on capital.
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We have deliberated at length on the issue in hand and concur with the specific observation of the CIT(Appeals) that the AO had rejected the books results of the assessee not on the basis of any substantial lapse in its books of account, but rather on the basis of vague observations that were recorded by him in the body of the assessment order. As observed by the CIT(Appeals), and rightly so, the AO had not only failed to point out any specific defect in the books of account of the assessee, but in fact had not even given any reason as to why the book results of the assessee were to be held as unreliable. Before proceeding any further we deem it fit to cull out the provisions of Section 145 of the Act which reads as under: “(1). Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2). The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assesses or in respect of any class of income. (3). Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.” (emphasis supplied by us) As can be gathered from a perusal of sub-section (3) of Sec. 145, the same as per the law as was available on the statute during the year under consideration contemplated three conditions on satisfaction of either of which rejection of books of accounts of the assessee with a consequential framing of assessment in the manner provided in Sec. 144 would get triggered, viz. (i). where the assessing officer is not satisfied about the correctness or completeness of the accounts of the assessee; or (ii). where the method of accounting i.e cash or mercantile system of accounting have not been regularly followed by the assessee; or (iii). where the accounting standards notified by the central government in the official gazette for any class of assesses or in respect of any class of income have not been regularly followed by the assessee. Now, in the present case before us it is not the case of the department that the assessee had failed to regularly follow a specified method of accounting or the notified accounting standards as a result whereof the rejection of its books of accounts would get triggered resulting into framing of the assessment in a manner specified under Sec. 144 of the Act. In fact, the AO had based the rejection of the books of accounts of the assessee for the reason that he was not satisfied with the
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correctness of its accounts. As observed by us hereinabove, a perusal of the assessment order reveals that the AO had rejected the books of accounts of the assessee for the reason that it had in the course of the assessment proceedings not only failed to produce all the vouchers for verification before him, but also by stating that the bills/vouchers supporting its claim for deduction of certain administrative expenses, viz. printing and stationary, office misc. expenses, repair and maintenance expenses, transport and hire charges may not match the decorum and level of presentation to which the AO may be accustomed, had thus in a way admitted to lack of maintenance of proper records. In our considered view, as observed by the CIT(Appeals), and rightly so, the AO had rejected the books results of the assessee not on the basis of any substantial lapse in its books of account, but rather on the basis of vague observations that were recorded by her in the body of the assessment order. As per the settled position of law, in case an AO is not satisfied about the correctness or completeness of the books of accounts, then, irrespective of whether the accounting methods or accounting standards are being regularly followed by the assessee, he is obligated to demonstrate that there exists serious defects in the maintenance of accounts as a result whereof the profits cannot be correctly deduced there from. However, as in the present case before us the AO while framing the assessment had not pointed out any specific defect in either the books of accounts, bills or vouchers of the assessee, thus, the same in our considered view would go to the very roots of the rejection of the books of accounts of the assessee by him. Our aforesaid conviction that in the absence of pointing out of any specific defect in the books of accounts of the assessee there would be no justification for the AO to reject the same is supported by the judgment of the Hon’ble High Court of Punjab & Haryana in the case of CIT Vs. Om Overseas (2009) 315 ITR 185 (P&H). In its aforesaid order the Hon’ble High Court while upholding the order of the Tribunal, had observed, that the rejection of the books of accounts of the assessee without pointing out any specific defect could not be sustained and had rightly been vacated by both the lower appellate authorities. Also a similar view had been taken by the Hon’ble High Court of Gujarat in the case of CIT Vs. Vikram Plastics & Ors. (1999) 239 ITR 161 (Guj). In its said order the Hon’ble High Court had upheld the order of the Tribunal which had set-aside the rejection of the books of accounts of the assessee for two fold reasons, viz. (i) that the AO had not pointed out any specific discrepancies or defects in the books of accounts of the assessee which were regularly being maintained; and (ii). that no material was brought on record by the AO which would establish that either the purchases or expenses were inflated or sales were suppressed. On a similar footing the Hon’ble High Court of Allahabad had in the case of Dr. Prabhu Dayal Yadav Vs. CIT (2018) 253 Taxman 191 (All) observed, that as the assessee had maintained his accounts and recorded his professional receipts and there was no evidence to doubt the correctness or completeness of his books of accounts, therefore, the rejection of the same was unsustainable in the eyes of law.
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Adverting to observation of the AO that the assessee had in the course of the assessment proceedings not only failed to produce all the vouchers for verification before him, but also by stating that the bills/vouchers supporting its claim for deduction of certain administrative expenses, viz. printing and stationary, office misc. expenses, repair and maintenance expenses, transport and hire charges may not match the decorum and level of presentation to which the AO may be accustomed, had thus admitted to lack of maintenance of proper records, the same in our considered view is nothing better than a vague observation which by no means could have justified triggering the provisions of Sec. 145(3) of the Act for rejecting the books of accounts of the assessee. We, say so, for the reason that there is neither any whisper in the body of the assessment order of even a single instance of any such claim of expenditure of the assessee which is not found to be supported by corresponding bills/vouchers, nor is there any mention of any such bill/voucher which not being as per the expected decorum and level of precision could be dubbed as unauthentic or bogus. In sum and substance, though the AO had tried to justify the rejection of the books of accounts of the assessee for the reason that there was a lack of maintenance of proper records by the assessee, but except for his general observations there is nothing discernible from the records which would evidence pointing out of any specific defect in the books of accounts of the assessee which would render them unreliable for deducing its correct income. Apart from that, the mere fact that the bills/vouchers supporting the assessee’s claim for deduction of expenses not being as per the expected decorum and level of precision as would be expected by the AO, not being in the nature of a serious infirmity would not suffice for subjecting its book results to the rigors of Sec. 145(3) of the Act. Our aforesaid conviction that insignificant mistakes in accounts cannot lead to rejection of books of accounts u/s 145(3) is supported by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Padamchand Ramgopal (1970) 76 ITR 719 (SC). In its aforesaid order, it was, inter alia, observed by the Hon’ble Supreme Court that insignificant mistakes in the accounts cannot justify rejection of books of accounts of the assessee under Sec. 145(3) of the Act. Accordingly, in the backdrop of our aforesaid observations, we are of the considered view that in the absence of pointing out of any specific defect in the books of accounts of the asseseee there was no justification for the AO to have rejected the same by triggering the provisions of Sec. 145(3) of the Act. We, thus, in terms of our aforesaid observations and deliberations qua the facts involved in the case before us read in light of the aforementioned judicial pronouncements set-aside the rejection of the books of accounts of the assessee by the AO. Accordingly, the order of the CIT(Appeals) is modified in terms of our aforesaid observations and the addition to the extent sustained by him by embarking on the process of estimation of the income of the assessee is herein directed to be vacated.”
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As the A.O in the present case before us had failed to point out any specific defect in the books of accounts of the assessee firm by referring to any specific instance which would irrefutably prove to the hilt that its claim for deduction of labor expenses was either not supported by corroborative material; or was on the basis of his concrete reasoning not found to his satisfaction, thus, rejection of the books of accounts on the basis of a vague and generalized observation, would by no means justify triggering of the provisions of Section 145(3) of the Act. Our aforesaid view is further fortified by the judgment of the Hon’ble High Court of Punjab & Haryana in the case of CIT Vs. Om Overseas (2009) 315 ITR 185 (P&H) and that of the Hon’ble High Court of Gujrat in the case of CIT Vs. Vikram Plastics & Ors. (1999) 239 ITR 161 (Guj). Also, a similar view was taken by the Hon’ble High Court of Allahabad in the case of Dr. Prabhu Dayal Yadav Vs. CIT (2018) 253 Taxman 191 (All). Apart from that, we hold a conviction that insignificant mistakes in accounts cannot lead to the rejection of books of accounts u/s. 145(3) of the Act. Our aforesaid view is supported by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Padamchand Ramgopal (1970) 76 ITR 719 (SC).
We, thus, in terms of our aforesaid observations, are of the considered view that in the absence of pointing out of any specific defect in the books of account of the assessee firm, there was no justification for the A.O to have rejected the same by triggering the provisions of Section 145(3) of the Act on the basis of his unsubstantiated and vague observations. Accordingly, we set aside the order of the CIT(Appeals) and vacate the addition of Rs.46,79,522/- made by the A.O.
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Resultantly, the appeal filed by the assessee is allowed in terms of our aforesaid observations.
Order pronounced in open court on 30th day of November, 2023.
Sd/- Sd/- ARUN KHODPIA RAVISH SOOD (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) रायपुर/ RAIPUR ; �दनांक / Dated : 30th November, 2023 **SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant. 2. ��यथ� / The Respondent. 3. The Commissioner of Income Tax (Appeals), Raipur (C.G.) 4. The Pr. CIT-1, Raipur (C.G.) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, रायपुर ब�च, रायपुर / DR, ITAT, Raipur Bench, Raipur. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // �नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, रायपुर / ITAT, Raipur.
