Vildirect: IncomeTax-caselaws-2010-VIL-868--DT

2010-VIL-868--DT

Equivalent Citation: [2011] 7 ITR 183

Income Tax Appellate Tribunal, AHMEDABAD

I. T. A. Nos. 974/Ahd/2007, 4363/Ahd/2007, 4364/Ahd/2007, 4403/Ahd/2007,

Date: 12.02.2010

RELIABLE SURFACE COATINGS

ACIT

Rasesh Shah for the Assessee
Abhijeet Kumar for the Department

BENCH

Deepak R. Shah, D. T. Garabia, JJ.

JUDGMENT

Deepak R. Shah, Accountant Member:-

This group of appeals by the assessee and the Revenue are directed against the respective orders of the learned Commissioner of Income-tax (Appeals)-VI, Baroda. Since common issue is involved in all these appeals, they were heard together and are being disposed of by this consolidated order for the sake of convenience.

Assessee's appeal, I. T. A. No. 974/Ahd/2007 assessment year 2004-05:-

This appeal is directed against the order of the learned Commissioner of Income-tax (Appeals)-VI, Baroda dated December 18, 2006 in an appeal against the assessment framed under section 143(3) of the Income-tax Act, 1961 (in short "the Act"). Since on the basis of assessment framed for this year, the assessment for earlier years were reopened. We deem it fit to dispose of this appeal at first instance.

The assessee is a partnership firm engaged in the business of painting of industrial shed, machinery and office premises and also the work of anti-corrosion work. A survey was conducted at the business premises of the assessee on August 24, 2005.

The first ground of appeal is against invoking the provisions of section 145(3) regarding rejection of books of account.

At the time of hearing the learned authorised representative for the assessee submitted that since no discrepancies were found in the books of account but also relating to wages paid as per wage register and that recorded in the books of account, the books of account were rejected, which is not in accordance with law.

We are not convinced with the arguments raised in this behalf. Since the entries as per the books of account were such which were not supported by wage register/vouchers for the same, therefore, as per section 145(3), there is no justification about the correctness or completeness of the accounts, such book results are liable to be rejected and the Assessing Officer is competent to make an assessment in the manner provided in section 144, i.e., to the best of the judgment.

The learned authorised representative for the assessee further submitted that if the books of account are liable to be rejected then the proper course of action as provided under section 145(3) is to make an assessment to the best of judgment and thereafter the Assessing Officer cannot take recourse to the books of account for computing the income. This contention is required to be accepted. Once, the book result is rejected, the Assessing Officer, thereafter once again cannot take recourse to the books of account so as to find out the income therefrom and make addition/disallowance. Since the income is to be assessed as per section 144, the income is to be assessed after taking into account all the relevant material to the best of the judgment. Accordingly, ground No. 1 is to be rejected.

The second ground is against the disallowance of Rs. 37,05,021 being the labour and wages charges paid by the assessee.

The assessee disclosed the gross receipt of Rs. 212.23 lakhs. During the course of survey wage and labour payment registers, which were found, were impounded. The payment of wages as per the impounded registers were worked out at Rs. 47,37,828. In the books of account the expenses claimed were Rs. 81,61,013. The discrepancy was first accepted by the partner of the firm and also agreed to pay the tax liability on the difference, if any. The Assessing Officer held that as per the wage register the payment of wages to the extent of Rs. 2,74,236 was made without signatures of the workers. The sum of Rs. 34,30,785 was an excess claim made in the account without corresponding wage register found. Therefore, total amount of Rs. 37,05,021 was disallowed. The Assessing Officer and the Commissioner of Income-tax (Appeals) observed that the difference between the claim in the profit and loss account and that of impounded wage registers were not properly explained. The discrepancy was accepted by the assessee during the course of survey. The payments are made in cash and, therefore, the amount is disallowable.

The learned authorised representative for the assessee submitted that though at the time of survey the discrepancy could not be reconciled in the absence of wage register found but later on when the wage register were produced before the Assessing Officer and the Commissioner of Income-tax (Appeals), the same were ignored on the plea of being additional evidence. The evidence is not an additional evidence, as if for some reason, the wage register is not impounded, it could not be said that wages are not paid. Mere statement recorded during the course of survey under section 133A is not binding. For this proposition the learned authorised representative for the assessee placed reliance on the following case law:-

Sl. No.	In the case of . . .	Reported in ...
1.	Paul Mathews and Sons v. CIT	[2003] 263 ITR 101 (Ker)
2.	CIT v. S. Khader Khan Son	[2008] 300 ITR 157 (Mad)
3.	Kailashben Manharlal Chokshi v. CIT	14 DTR 257 (Guj)
4.	Ashok Manilal Thakkar v. Asst. CIT	[2005] 279 ITR (AT) 143 (Ahd); 97 ITD 361

The learned authorised representative further submitted that even for earlier years when no wage register was found, the learned Commissioner of Income-tax (Appeals) deleted the disallowance but estimated the net profit at 12 per cent. of the gross receipt. Though, the income is to be estimated, estimation of 12 per cent. of gross receipt is higher. The estimation cannot be arbitrary as held by the hon'ble Rajasthan High Court in the case of CIT v. Inani Marbles P. Ltd. reported in [2009] 316 ITR 125. The same has to be on the basis of past record. Though the auditors have not specifically stated that the wage register was examined by them but there are no adverse comments regarding non maintenance of wage register. If, net profit is to be estimated, as per past history which is at page 2 of the paper book, for the earlier years which are not in dispute the net profit ratio adopted were 6.38 per cent. and since for earlier years the net profit is ranging between 7.49 per cent. to 8.27 per cent., for the assessment year 2004-05 the net profit declared by the assessee before the payment of remuneration to partners is 8.27 per cent. and hence the same are acceptable results. He accordingly pleaded that since the income is to be estimated to the best of judgment, the same has to be after taking into account all the relevant material and which could not be arbitrary or fanciful.

The learned Departmental representative, on the other hand, submitted that though the books of account are rejected, the Assessing Officer has computed the income under section 143(3) of the Act. The Assessing Officer has gone by the book result and disallowed the expenditure which are not supported by proper vouchers or explanation thereon. The assessee failed to produce the wage register during the course of survey in spite of several opportunities. Some of the vouchers are not even signed. Thus, there is no justification for allowability of such expenses. The Assessing Officer worked the average wages payable for three years, i.e., from the assessment year 1999-2000, 2000-01 and 2001-02 and, therefore, on the basis of these years average expenses were allowed producing the wage register at later stage amounts to filing of additional evidence, which were not made available during the course of survey. Therefore, the action of the Assessing Officer is to be upheld.

We have considered the rival submissions. Since it is held that books of account are not correct and complete, the income is to be computed to the best of judgment as per the provisions of section 144 of the Act. Section 144 provides that the Assessing Officer, after taking into account all the relevant material which the Assessing Officer has gathered, shall, after giving the assessee an opportunity of being heard, make the assessment. When the income is to be computed to the best of judgment, the same has to be on the basis of considering all the relevant materials. It is settled law that even if the assessment is to be made to the best of judgment such assessment cannot be arbitrary or fanciful, but after considering the past history and the present circumstances. Even the guidelines provided by the statutory provisions can also be considered. Computing the income as per presumptive taxation scheme is found in section 44AD of the Act. Section 44AD provides that where an assessee is engaged in the business of civil construction or supply of labour for civil construction, a sum equal to eight per cent. of the gross receipts paid shall be deemed to be the profits and gains of such business. Section 44AD also exempts the assessee from maintenance of books of account. As per the Explanation to section 44AD, the expression "civil construction" includes:-

(a) the construction or repair of any building, bridge, dam or other structure or of any canal or road;

(b) the execution of any works contract.

The assessee is found to be engaged in the business of executing works contracts like painting work of the premises. Thus useful reference can be made to section 44AD for estimation of income.

We find that the decision of the hon'ble Rajasthan High Court in the case of CIT v. Inani Marbles P. Ltd. reported in [2009] 316 ITR 125, relied upon by the learned authorised representative will not apply to the facts of the present case. In the said case, profit was to be estimated which were estimated by the Tribunal on the basis of the assessee's own result for earlier years. Even the result of earlier years were rejected but the Tribunal has estimated the net profit in that earlier year. However, in the present case, the net profit declared by the assessee for the earlier years have not been accepted and the result accepted for the assessment year 1998-99 are in respect of which the labour charges were not found to be inflated. Therefore, the estimation of net profit on the basis of earlier years though relevant is not sacrosanct. Since in the present case, the assessee is found to have paid labour charges without corresponding vouchers/wage register, the profit has to be estimated and considering these facts the net profit has been estimated to be 10 per cent. before payment of remuneration and interests to the partners. We, therefore, direct the Assessing Officer to compute the income at 10 per cent. of the contract receipts. This will take care of all the additions/disallowances subject to payment of interest and remuneration payable to working partners within the limit prescribed under section 40(b) of the Act. Since, the income is directed to be computed at 10 per cent. of contract receipts, no further disallowance by way of labour charges is called for.

The third ground of appeal is against upholding the addition of Rs. 2,99,590 due to difference in the accounts of the assessee with M/s. Ber-ger Paints Ltd.

The fourth ground of appeal is against the addition of Rs. 5,36,761 being difference in the closing balance of creditors' account including a sum of Rs. 2,91,590 being difference in the accounts of M/s. Berger Paints India Ltd.

Ground No. 5 is against the addition in respect of Rs. 3,18,059 under section 69A being the amount deposited in bank account.

Since the income has been estimated to the best of judgment and the difference in the accounts of creditors on deposit in bank account being an application of such income, no separate addition for this year is called for. It is also made clear that the discount of Rs. 2,91,590 stated to be received by the assessee during this year is part of income assessed for this year and hence the same amount shown as income in the subsequent year is to be excluded. Therefore, since the addition is made in this year hence in subsequent year it is to be excluded when the amount is actually offered for tax by the assessee. Similarly, the addition of Rs. 5,36,761 is also not sustainable as the income is estimated and the difference in the account of the creditors being application of such income, no separate addition is called for. Similarly, the deposit in bank account being application of the income, no separate addition is called for since source is taxed by estimating net profit. The hon'ble Punjab and Haryana High Court in the case of CIT v. Aggarwal Engg. Co. [2008] 302 ITR 246 held that when the income is estimated from the contract by application of net profit ratio, no further addition was called for under sections 68 and 69B of the Act. Similar view has been adopted by the hon'ble Allahabad High Court in the case of CIT v. Banwari Lal Banshidhar [1998] 229 ITR 229. Applying the same precedent, we delete the addition of Rs. 5,36,761 which also includes the addition of Rs. 2,91,590 being the difference in the account of the creditor added under section 69 of the Act and the addition of Rs. 3,18,059 being the amount deposited in the bank account added under section 69A of the Income-tax Act, 1961. However, it is made clear that if the application of income is more than the addition sustained being difference of 10 per cent. of the contract receipt and profit declared by the assessee, then if such application is higher, such higher amount is to be brought to tax.

The next ground of appeal is against disallowance of remuneration payable to partner Shri Shashi Mishra.

The disallowance was made on the finding that Smt. Shashi Mishra is not a working partner. Since she is not a working partner, remuneration payable to her even as per the deed of partnership is not allowable under the provisions of section 40(b) of the Act. Therefore, disallowance is to be upheld. Since remuneration payable to Smt. S. Mishra is not held to be allowable while computing the income of the firm in terms of the proviso to section 28(v), the same will not form part of the income of Smt. S.Mishra and if so assessed is required to be excluded from her income. This appeal is, therefore, partly allowed.

I. T. A Nos. 4363 and 4364/Ahd/2007 (by assessee) and I. T. A. Nos. 4406 and 4407/Ahd/2007 (by Revenue) for the assessment years 2002-03, 2003-04 respectively:-

These cross-appeals by the assessee and the Revenue are directed against the common order passed by the leaned Commissioner of Income-tax (Appeals)-VI, Baroda, dated September 28, 2007 pertaining to the assessment years 2002-03 and 2003-04 in appeals against the assessment framed under section 143(3) read with section 147 of the Act.

In appeals by the assessee, the first ground of appeal relates to rejection of book result and invoking the provisions of section 145(3) of the Act. Since, the facts related to these issues are the same as discussed by us in the assessee's appeal for the assessment year 2004-05, following our reasoning therein, this ground is required to be dismissed. We also hold that since books of account are to be rejected, the income is to be estimated based on our findings for the assessment year 2004-05. The income to be assessed for this year shall be computed at 10 per cent. of the contract receipts and not on the basis of books of account maintained by the assessee.

The next ground of appeal is partial disallowance of wage and labour expenses as claimed by the assessee.

The Assessing Officer held that as per the impounded wage register, the payment of wages and labour charges are worked out at Rs. 22,77,894 for the assessment year 2002-03 and Rs. 36,41,712 for the assessment year 2003-04 but the assessee has claimed expenses of Rs. 47,77,811 for the assessment year 2002-03 and Rs. 64,27,250 for the assessment year 2003-04. The Assessing Officer also found that payments were made without the signatures of the workers on the wage/labour register. These payments were Rs. 2,07,962 and Rs. 1,23,075 for the assessment years 2002-03 and 2003-04 respectively. Thus, the difference between expenses claimed as per the profit and loss account and that between the wages payable according to the wage register impounded and the expenses paid without the signatures of the workers on the vouchers were disallowed. Before the Commissioner of Income-tax (Appeals), it was contended that the difference cannot be worked out only on the basis of entries as per the profit and loss account and that found in the impounded wage register. It was contended that there were other wages register but were lying at different place and hence not impounded. Even the copy of provident fund returns were filed and the same are also audited by auditors.

The learned Commissioner of Income-tax (Appeals) upheld the action of the Assessing Officer in rejecting the books of account by invoking the provisions of section 145(3) of the Act by observing as under:-

"5.1. I have carefully considered the plea of the appellant. It is a fact that major irregularities were noticed during the course of survey in respect of labour/wage charges. Though the auditors had submitted their report much prior to the date of survey, however, these are subject to and based on the documents furnished to them. In other words in view of rejection of books of account the labour/wage charges payable, accounts shown in the balance-sheet are suspected. Further the survey party had compiled the details of labour/wage charges actually paid based on the registers impounded which are undisputably relating to the appellant's business. The charges paid in a particular year could also relate to the charges payable of the earlier year. More so in the appellant's line of business where payment to illiterate labour class cannot be kept pending and is to be disbursed on weekly/fortnightly basis. Admittedly, the labour charges are most manipulable items as these are paid to casual workers whose whereabouts and details are not known and these payments are made in cash through vouchers. So it is apparently simpler to inflate such unverifiable expenses. The survey has revealed that the practice was continuing for the past few years. However it is also true that certain labour and wage expenses specially for March would remain payable. Since accounts of the appellant are not reliable and receipts of appellant are not challenged it can be fairly estimated that at best 10 per cent. of receipt are unpaid labour charges. The plea of the appellant is thus partly accepted and net of unpaid expenses, e.g., 10 per cent. of (receipts of the assessment year 2003-04—receipts of the assessment year 2002-03, Rs. 1,55,09,474 - Rs. 1,07,01,727 = Rs. 48,07,747) i.e., Rs. 4,80,775 and (receipts of the assessment year 2002-03—receipt of the assessment year 2001-02, Rs. 1,07,01,727 - Rs. 98,04,156 = Rs. 8,97,571) i.e., Rs. 89,757 is to be allowed."

Against sustenance of disallowance, the assessee is in appeal before us, whereas against the partial relief granted by the Commissioner of Income-tax (Appeals), the Revenue is in further appeal.

We find that the facts of these cases are identical as discussed by us in appeal of the assessee for the assessment year 2004-05. By applying the said findings, we uphold the rejection of books of account and consequential estimate of net profit at 10 per cent. of the contract receipts as held by us for the assessment year 2004-05 in the assessee's own case hereinabove. Since the net profit is estimated, no further disallowance for labour charges is called for. We, therefore, delete the disallowance of labour/wages charges as made by the Assessing Officer.

Ground No. 4 for the assessment year 2002-03 is against the addition of Rs. 1,66,934 being unaccounted advances to workers treated as unexplained expenses under section 69A of the Act.

Ground No. 5 for the assessment year 2002-03 and ground No. 3 for the assessment year 2003-04 is against the addition of Rs. 2,55,903 and Rs. 1,72,983 being the unexplained investment under section 69 in respect of the amount deposited in bank account.

These issues are similar to the ground relating to investment made under section 69 for the assessment year 2004-05 in ground Nos. 3, 4 and 5 of the appeal in the assessee's own case. Following our order for the assessment year 2004-05, we uphold that since the income is assessed at source by estimating the net profit and the addition referred to in this ground being application of income, no separate addition is called for subject to the fact that if the application is more than the additional income taxed at source, the addition to be sustained shall be only to the extent if the application is higher than the source of such income. It is also made clear that if in any earlier year any intangible addition is made and not found to be applied towards unexplained investment or expenditure, the same shall be available for telescoping against unexplained investment or expenditure made during these years.

The next ground of appeal is against the disallowance of remuneration payable to the partner Smt. S. Mishra.

The disallowance was made on the finding that Smt. S. Mishra is not a working partner. Since she is not a working partner, remuneration payable to her even as per the deed of partnership is not allowable under the provisions of section 40(b) of the Act. Therefore, disallowance is to be upheld. Since remuneration payable to Smt. S. Mishra is not held to be allowable while computing the income of the firm, in terms of the proviso to section 28(v), the same will not form part of the income of Smt. S. Mishra and if so assessed is required to be excluded from her income.

In the result, both these appeals of the assessee are partly allowed and that of the Revenue's are dismissed.

I. T. A. Nos. 4403, 4404 and 4405/Ahd/2007 (by the Revenue) and the cross-objection Nos. 29, 30 and 31/Ahd/2008 by the assessee for the assessment years : 1999-2000, 2000-01 and 2001-02 respectively:-

These appeals by the Revenue and the cross-objections by the assessee are directed against the common order of the learned Commissioner of Income-tax (Appeals)-VI, Baroda, dated September 28, 2007 in an appeal against the assessment framed under section 143(3) read with section 147 for the assessment years 1999-2000, 2000-01 and 2001-02.

The Assessing Officer noted that average wages paid as per the impounded wage register for the assessment years 2002-03, 2003-04 and 2004-05 were worked out at 22.41 per cent. of the contract receipt. The wages paid for the years under appeals were higher. The average wages paid as percentage of labour charges claimed as per profit and loss account were found to be 41.62 per cent. The Assessing Officer, therefore, concluded that even for the earlier years there is inflation in wages paid and hence, the assessments were reopened. The Assessing Officer disallowed the excessive wages on the basis of average ratio for the assessment years 2002-03, 2003-04 and 2004-05. The learned Commissioner of Income-tax (Appeals) upheld the action of the Assessing Officer in rejecting the book result by invoking the provisions of section 145(3). However, regarding the estimation of income, the learned Commissioner of Income-tax (Appeals) held as under:-

"5.3.2. From the facts and circumstances of the case and the fact that the labour charges were made in cash to workers who are illiterate and whose whereabouts are not known to the appellant and also from the appraisal of the documents found at the time of survey, I am of the view that disallowance out of the labour expenses are called for. The only issue is about the basis for such disallowance. The Assessing Officer adopted the average ratio of disallowable expenditure to total receipts for the assessment years 2002-03 to 2004-05 for working out the disallowances out of labour charges. In my view, future years' expenses may not be a good indicator for estimating labour expenses of the past years. Business maturity of enterprise, inflation and brand equity are some of the factors which negate mechanical application of such ratios. Further such ratios were derived based on actual registers/documents found during survey and inference drawn therefrom. For the assessment years 1999-2000 and 2000-01 no labour registers were found or produced during survey on August 24, 2005 or subsequently on August 29, 2005. Since receipts have not been disturbed by the Assessing Officer it would be much better to adopt a net profit rate for the assessment years 1999-2000 and 2000-01. Considering that the appellant is engaged in a composite contract work and also trading in paints and associated materials in my view a net profit rate of 12 per cent. of gross receipt would be a fair estimate under the facts and circumstances of the case. The net income before remuneration and interest of partners' capital for the assessment years 1999-2000 and 2000-01 are estimated at Rs.7,12,120 (12 per cent. of Rs. 59,34,332) and Rs. 11,22,483 (12 per cent. of Rs. 93,54,025) respectively.

5.3.2.1 For the assessment years 1999-2000 and 2000-01 the first part of ground No. 2 is thus partly allowed.

5.3.3. In regard to the assessment year 2001-02 however documents/registers impounded revealed excess labour/wages charges than those claimed in the profit and loss account. Even after discounting wage charges and accounting for net unpaid labour charges at 10 per cent., the labour charges claimed in the profit and loss account are less than those found recorded in the impounded documents/records. Accordingly, no addition is justified for the assessment years 2001-02. The addition of Rs. 18,54,946 is thus deleted."

Against the deletion of disallowance, the Revenue is in appeal, whereas the assessee in cross-objection has challenged the estimation of income at 12 per cent.

The facts of these issues are identical with the issues decided by us in the assessee's own case for the assessment year 2004-05 hereinabove. Following our reasoning therein we uphold the rejection of books of account as per section 145(3) of the Act. Consequently the income is to be estimated as per the provisions of section 144 of the Act to the best of judgment. By applying our decision for the assessment year 2004-05, we direct the Assessing Officer to estimate the income at 10 per cent. of contract receipt subject to payment of interest to the partners and remuneration to the working partners.

In the cross-objection, the other grounds relates to disallowance of remuneration payable to Smt. S. Mishra.

In the result, the appeals are dismissed and the cross-objections are partly allowed.

We summarise the result as under:-

(1) The assessee's appeal, I. T. A. No. 974/Ahd/2007 for the assessment year 2004-05 is partly allowed.

(2) The assessee's appeals, I. T. A. Nos. 4363 and 4364/Ahd/2007 for the assessment years 2002-03 and 2003-04 are partly allowed, whereas the Revenue's appeals, I. T. A. Nos. 4406 and 4407/Ahd/2007 for the assessment years 2002-03 and 2003-04 are dismissed.

(3) The Revenue's appeals, I. T. A. Nos. 4403, 4404 and 4405/Ahd/2007 for the assessment years 1999-2000, 2000-01 and 2001-02 are dismissed and the assessee's cross-objection Nos. 29, 30 and 31/Ahd/2008 are partly allowed.

The order pronounced in the open court on February 12, 2010.

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