IT: Where accounts were audited by Chartered Accountants on basis of books of account and assessee's books were not rejected during assessment, assessing authority should rely upon auditor's report
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[2013] 35 taxmann.com 168 (Allahabad)
HIGH COURT OF ALLAHABAD
Pragati Engineering Corpn.
v.
Income-tax Officer, Raebareli*
RAJIV SHARMA AND SEED-UZ-ZAMAN SIDDIQI, JJ.
IT APPEAL NO. 11 OF 2012†
APRIL 5, 2013
Section 144, read with section 44AD, of the Income-tax Act, 1961 - Best judgment assessment [Civil construction business] - Assessment year 2005-06 - In scrutiny assessment, assessee, a construction contractor, failed to produce its books of account - It submitted that its books were impounded by police in criminal proceeding against husband of one of its directors - It offered to be assessed at rate of 8 per cent net rate – Its accounts were audited by Chartered Accountant on basis of books of account and on that basis, return was filed moreover said books were not rejected in assessment proceedings - Whether authorities ought to rely upon auditor's report to compute its income - Held, yes - Whether, therefore, matter was to be remanded to decide it afresh - Held, yes [Para 17] [Matter remanded]
FACTS
| ■ | In scrutiny assessment, the assessee , a construction contractor, failed to produce some of its books of account. | |
| ■ | It submitted that its books were impounded by the police in the criminal proceedings initiated against the husband of one of the partners and when the same were released by the Court's order, the entries made on the books of account got erased on account of being placed/kept in a jute bag in an open area and it agreed to be assessed at 8 per cent net rate. | |
| ■ | The Assessing Officer noticed that turnover of the assessee was beyond the prescribed limit of Rs. 40,00,000 whereby he had to maintain books and, therefore, held that adoption of flat rate of 8 per cent under section 44AD was not permissible in law and he made addition to assessee's income. | |
| ■ | The Commissioner (Appeals) confirmed the said addition. | |
| ■ | The Tribunal concurred with the Commissioner (Appeals). | |
| ■ | On further appeal: |
HELD
| ■ | Section 44AD was inserted by the Finance Act, 1994 with effect from 1-4-1994. Sub-section (1) of section 44AD clearly provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, income shall be estimated at 8 per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as may be declared by the assessee in his return of income notwithstanding anything to the contrary contained in sections 28 to 43C. This income is to be deemed to be the profits and gains of said business chargeable to tax under the head 'Profits and gains of business. However, the said provisions are applicable where the gross receipts paid or payable does not exceed Rs.40 lakhs. | |
| ■ | It is not in dispute that accounts of the assessee were audited by the Chartered Accountant on the basis of books of account and on that basis, return of income was filed by the assessee, showing income as Rs.4,43,630. It is also not in dispute that the assessment under section 143(3) was completed and the books was not rejected under section 144. Therefore, the auditors' report can be relied upon by the revenue authorities in the absence of the books of account. [Para 16] | |
| ■ | In the instant case also upto the assessment year under consideration, the account books for earlier assessment years were accepted and the appellant's firm was assessed accordingly but in the assessment year under consideration, certain expenditures were disallowed without any basis in an arbitrary manner. The Tribunal has also fell into a serious error in not taking into consideration its earlier view relied upon by the appellant, wherein the Tribunal had applied a net profit rate at the rate of 5.25 per cent as against the net profit at the rate of 8 per cent on the gross receipts of Rs.3,06,71,363 applied by the assessing authority. Not following earlier decision on the same issue is against all settled judicial discipline. When the judgment was brought to the notice of the Tribunal, it was the onerous duty of the Tribunal either to follow it in its letter and spirit or to record reasons for disagreement. [Para 17] | |
| ■ | For the reasons aforesaid, in the absence of books of account, the assessing authority ought to have considered the other documents i.e., auditor's report. [Para 18] | |
| ■ | Accordingly, the impugned judgment and order dated 25-5-2012 passed by the Tribunal was set aside and the matter remitted back to the Tribunal to decide it afresh, in accordance with law. [Para 19] |
CASE REVIEW
Addl. CIT v. Jay Engg. Works [1978] 113 ITR 389 (Delhi) (para 16) followed.
Pragati Engineering Corporation v. ITO [2012] 137 ITD 355/24 taxmann.com 94 (Luck)(TM) (para 19) reversed.
CASES REFERRED TO
CIT v. Eastern Medi Kit Ltd. [2011] 337 ITR 56/202 Taxman 572 (Delhi) (para 10), Addl. CIT v. Jay Engg. Works [1978] 113 ITR 389 (Delhi)(para 15), Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) (para 17), Sardar Kehar Singh v. CIT [1992] 195 ITR 769/55 Taxman 416 (Raj.) (para 17) and Lachhiram Puranmal v. CIT [2001] 119 Taxman 1 (MP) (para 17).
Pradeep Agarwal for the Appellant. Prashant Kumar for the Respondent.
ORDER
1. Heard Sri Pradeep Agarwal, learned Counsel for the appellant and Sri Prashant Kumar, learned Counsel for the respondents.
2. This instant income tax appeal under Section 260-A of the Income Tax Act has been filed by Pragati Engineering Corporation-appellant against the judgment and order dated 25.5.2012 passed by the Income Tax Appellate Tribunal, Lucknow Bench 'B', Lucknow [hereinafter referred to as the"Tribunal"] in I.T.A. No. 304/LKW/2011 for the Assessment Year 2005-2006, whereby the Tribunal has dismissed the appeal.
3. Shorn off unnecessary details the facts of the case are as under :
Pragati Engineering Corporation-appellant is a partnership firm and is engaged in the business of civil contractors in district Raibareli. During the Assessment Year 2005-2006, the appellant had received gross payment from various Government department to the tune of Rs.1,33,76,545/-, which was audited by the Chartered Accountants on the basis of books of accounts. Thereafter, on 30.10.2005, appellant had filed its return of income for the Assessment Year 2005-2006, showing income of Rs.4,43,630/-.
In compliance to a notice issued under Section 143 (2), various details asked from time to time, were furnished by the appellant. Since the case was selected for scrutiny, the appellant/assessee was asked to produce the books of account but it failed to produce the cash book etc. and only ledger copies of purchase, labour charges, salary payable etc. were produced on 9.7.2007. Thereafter, appellant/assessee was repeatedly asked to produce the vouchers etc. in support of its claim of incurring respective expenses but the same were not made available before the Assessing Authority.
4. According to the appellants, the husband of one partner, namely, Smt. Vaishali Singh, erstwhile Member of Legislative Assembly, who was challaned under Sections 147, 148, 149, 323, 506, 364, 384 I.P.C. in Case Crime No. 136 of 2003 at Police Station Kotwali, Raebareli, was absconding and as such, a proceedings under Section 82/83 Cr.P.C. were initiated against him. In the said proceeding, the police has taken away all the books of accounts including other household items pertaining to the Financial Year 2004-2005 (Assessment Year 2005-2006). Subsequently, vide order dated 24.1.2006 passed by the Special Judge, Lucknow in Criminal Misc. Case No. 22 of 2006, the books of accounts, which were impounded by the police, were returned but by that time, all the entries made therein had practically washed away and no part of the books of accounts was in a position to be produced before the Assessing Authority concerned on the grounds that books of accounts were kept in an open area in a jute bag. In these backgrounds, the appellant had filed a written submission dated 20.11.2007 before the Assessing Authority, stating therein that in the absence of the books of accounts, the assessee is agreeable for estimation of income and agreed for a net profit of 8% of the gross receipts.
5. On receipt of the said written submission dated 20.11.2007, the Assessing Authority observed that the turnover of the assessee was beyond the prescribed limit of Rs.40,00,000/-, whereby he has to maintain book and, therefore, adoption of flat rate of 8% under Section 44AD of the Act is not permissible in law. Accordingly, the Assessing Authority, vide order dated 6.12.2007, while making additions in the expenditure account ranging from 10% to 20% and making total addition to the tune of Rs.12,55,520/- determined the total income at Rs.16,99,150/- against the returned income of Rs.4,43,630/- for the Assessment Year 2005-2006.
6. Feeling aggrieved by the Assessment Order dated 6.12.2007, assessee/appellant preferred an appeal before the Commissioner of Income Tax (Appeal)-II, Lucknow, who, vide order dated 1.2.2011, dismissed the appeal and confirmed the addition of Rs.12,55,520/- made by the Assessing Authority.
7. Not being satisfied with the above orders dated 6.12.2007 and 1.2.2011, the assessee/appellant preferred second appeal, bearing No. ITA No. 304/LKO/2011, before the Tribunal. Vide order dated 24.11.2001, Judicial Member of the Tribunal allowed the appeal partly, whereas Accountant Member of the Tribunal dismissed the appeal. Accordingly, the following point of difference was referred to the third Member of the Tribunal under Section 255 (4) of the Act by the Tribunal:
"Whether the Tribunal being the last fact finding body can estimate the net profit from the business of the assessee in the absence of books of account instead of confirming the disallowances sustained by the ld. CIT (A) under various heads?"
8. On reference, the Third Member of the Tribunal decided the above issue and concurred his opinion with the Accountant Member vide order dated 14.5.2012 and as such, a separate order was passed by the Bench on 25.5.2012, dismissing the appeal.
Hence the instant appeal.
9. Sri Pradeep Agarwal, learned Counsel for the assessee/appellant submits that Section 44 AD was brought on the statute book only with an intention that in case of a civil contractor, who does not maintain books of accounts, then, he shall be assessed by applying a net rate of 8%. In the present case, though the books of accounts are maintained, the tax audit report was submitted but the Assessing Authority erred in not applying net rate of 8% under Section 44 AD of the Act as offered by the appellant.
10. Sri Agarwal further submits that while adjudicating the appeal, learned Commissioner of Income Tax (Appeal), has stated that appellant agreed to be assessed at the rate of 8% of net profit as against the net profit of 3.31% and had also requested to allow salary to the partners, interest on partners capital under Section 40 (b) and to allow depreciation on fixed assets but learned Commissioner did not appreciate the facts and the submissions made by the appellant and dismissed the appeal vide order dated 1.2.2011. He submits that the Accountant Member and the Third Member had dismissed the appeal of the appellant on placing reliance upon a case in the case of CIT v. Eastern Medi Kit Ltd. [2011] 337 ITR 56/202 Taxman 572 (Delhi). He submits that Eastern Medi Kit Ltd. (supra) is not applicable in the instant case as two decisions of Allahabad High Court were not considered and the facts of the present case are entirely different. Thus, the findings arrived by the Tribunal in the impugned order are highly perverse and illegal and against the facts of the case.
11. Elaborating his submission, Sri Agarwal submits that under identical situation i.e. in I.T.A. No. 289/LUC/2009 :M/s Universal Construction, B-2, Balaji Houses, Birbal Sahani Marg, Lucknow v. I.T.O., Raebareli, for the Assessment Year 2005-2006, decided on 15.6.2010, the Tribunal had applied a net profit rate at the rate of 5.25% as against the net profit at the rate of 8% on the gross receipts of Rs.3,06,71,363/- applied by the Assessing Authority. The appellant had placed a copy of the said judgment before the Tribunal but the same has neither been considered nor it disagreed with the aforesaid decision. Thus, the impugned order is liable to be set-aside.
12. Per contra, Sri Prashant Kumar, learned Counsel for the respondents submits that the tribunal after hearing the parties and going through the material on record has rightly dismissed the appeal of the assessee. While dismissing the appeal, the Tribunal has recorded findings of facts and laws relating to the present facts and circumstances of the case in detail. Thus, the appeal is liable to be dismissed.
13. We have heard learned Counsel for the parties and perused the records.
14. Section 44AD of the Act was inserted by Finance Act, 1994 w.e.f. 1.4.1994. Sub-section (1) of Section 44AD clearly provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, income shall be estimated at 8% of the gross receipts paid or payable to the assessee in the previous year on account of such business or a sum higher than the aforesaid sum as may be declared by the assessee in his return of income notwithstanding anything to the contrary contained in Sections 28 to 43C of the Act. This income is to be deemed to be the profits and gains of said business chargeable to tax under the head "profits and gains" of business. However, the said provisions are applicable where the gross receipts paid or payable does not exceed Rs.40 lacs.
15. In the case of Addl. CIT v. Jay Engg. Works [1978] 113 ITR 389, Hon'ble Delhi High Court has held that when the books of accounts have been destroyed in fire, then, the learned Tribunal should mainly rely upon the audit report because the said evidence is admissible under the Evidence Act, 1872.
16. In the instant case, the stand of the assessee before Commissioner of Income-tax (Appeal) and the ITAT was that though he had prepared the books of accounts but books of accounts and vouchers were impounded by the police in the proceedings under Section 82/83 Cr. P.C., which were initiated against the husband of one of the partner and when the same was released by the Court's order, the entries made on the books of accounts erased on account of being placed/kept in a jute bag in an open area and, as such, the assessee agreed to assess 8% net rate, in the absence of books of accounts. The Assessing Authority rejected the plea of the assessee on the grounds that the assessee failed to submit the books of accounts. It is not in dispute that accounts of the assessee was audited by the Chartered Accountant on the basis of books of accounts and on that basis, return of income was filed by the assessee, showing income as Rs.4,43,630.00. It is also not in dispute that the assessment under Section 143 (3) of the Act was completed and the books was not rejected under Section 144 of the Act. Therefore, the auditors report can be relied upon by the Revenue authorities in the absence of the books of accounts in view of Jay Engineering Works (supra).
17. In Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC), Sardar Kehar Singh v. CIT [1992] 195 ITR 769/55 Taxman 416 (Raj.) and Lachhiram Puranmal v. CIT [2001] 119 Taxman 1 (MP), it has been held that when a fundamental aspect permitting through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be altered in a subsequent year i.e. year under consideration. In the instant case also upto the assessment year under consideration, the account books for earlier assessment years were accepted and the appellant's firm was assessed accordingly but in the assessment year under consideration, certain expenditures were disallowed without any basis in an arbitrary manner. The Tribunal has also fell into a serious error in not taking into consideration its earlier view expressed in I.T.A. No. 289/LUC/2009:M/s Universal Construction, B-2, Balaji Houses, Birbal Sahani Marg, Lucknow v. I.T.O., Raebareli, for the Assessment Year 2005-2006, decided on 15.6.2010, which was relied upon by the appellant, wherein the Tribunal had applied a net profit rate at the rate of 5.25% as against the net profit at the rate of 8% on the gross receipts of Rs.3,06,71,363/- applied by the Assessing Authority. Not following earlier decision on the same issue is against all settled judicial discipline. When the judgment was brought to the notice of the Tribunal, it was the onerous duty of the Tribunal either to follow it in its letter and spirit or to record reasons for disagreement.
18. For the reasons aforesaid, we are of the view that in the absence of books of accounts, the Assessing Authority ought to have considered the other documents i.e. auditor's report.
19. Accordingly, we set-aside the impugned judgment and order dated 25.5.2012 passed by the Tribunal and remit the matter back to the Tribunal to decide it afresh, in accordance with law.
POOJARegards
Prarthana Jalan
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