Shri Rajendra Suryavanshi, Solapur V. Addl C.I.T, Solapur

ITA 1712/PUN/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2714 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 6 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 28-01-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 17-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANN KAPTHUAMA
• Keywords: Additional evidence
• Section: 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E , , !'!! # , $ % BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 1712/PN/2012 $& ' !(' / ASSESSMENT YEAR : 2003-04 SHRI RAJENDRA SURYAVANSHI, PROP. OF PARTH ENTERPRISES, A/P: ANAWALI, TAL.: PANDHARPUR, DISTT.-SOLAPUR PAN : AJWPS3707M ....... / APPELLANT )& / V/S. ADDL. COMMISSIONER OF INCOME TAX, RANGE 2, SOLAPUR / RESPONDENT ASSESSEE BY : SHRI S.N. PURANIK REVENUE BY : MS. ANN KAPTHUAMA / DATE OF HEARING : 23-12-2015 / DATE OF PRONOUNCEMENT : 19-02-2016 * / ORDER PER VIKAS AWASTHY, JM : THE APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE OR DER OF COMMISSIONER OF INCOME TAX (APPEALS)-III, PUNE DATED 30-0 8-2011 FOR THE ASSESSMENT YEAR 2003-04. 2 ITA NO. 1712/PN/2012, A.Y. 2003-04 2. IN APPEAL, THE ASSESSEE HAS PRIMARILY IMPUGNED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN CONFIRMING (I) THE ADDIT ION OF ` 20,38,571/- BY REDUCING THE VALUE OF OPENING STOCK; AND (II) CONFIRMING AD HOC DISALLOWANCE OF ` 7,50,000/- ON ACCOUNT OF PAYMENTS MADE TO LABOURERS. 3. THE FACTS OF THE CASE AS EMANATING FROM THE RECORDS ARE: THE ASSESSEE IS A GOVERNMENT CONTRACTOR. THE ASSESSEE FILED HIS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ON 21-10-2003 DECLARING TOTAL INCOME OF ` 14,69,143/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICE U/S. 143(2) WAS ISSUED T O THE ASSESSEE. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS TH E ASSESSING OFFICER OBSERVED THAT AS PER THE PROFIT AND LOSS ACCOUNT THE GROSS CONTRACT RECEIPTS OF THE ASSESSEE ARE TO THE TUNE OF ` 2,86,20,061/- AND THE GROSS PROFIT DECLARED BY THE ASSESSEE IS ` 52,57,155/-. THE ASSESSEE HAD CLAIMED EXPENDITURE TO THE TUNE OF ` 75,00,000/- TOWARDS LABOUR PAYMENTS. THE ASSESSEE WAS ASKED TO SUBSTANTIATE THE SAME BY PRODUCING RELEVANT VOUCHERS ETC. AFTER SCANNING THE DOC UMENTS PRODUCED BY THE ASSESSEE THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAS NOT MAINTAINED BASIC RECORD LIKE NAME OF THE SITE, QUA NTITY OR MEASUREMENT OF WORK, ETC. THE PAYMENT SHEETS PRODUCED BY THE ASSESSEE SEEMS TO HAVE BEEN PREPARED AFTERWARDS, AT N UMBER OF PLACES THE SAME PERSON HAS SIGNED AND THE REVENUE STAMPS AR E OVERLAPPING. THE ASSESSING OFFICER ON THE BASIS OF DISCREPANCIES AND DEFE CTS IN THE DOCUMENTS PRODUCED BY THE ASSESSEE MADE AD HOC DISALLO WANCE OF 20% OF THE LABOUR PAYMENTS I.E. ` 15,00,000/-. 3 ITA NO. 1712/PN/2012, A.Y. 2003-04 THE ASSESSING OFFICER FURTHER MADE DISALLOWANCE ON ACCOUNT OF WORK IN PROGRESS. THE ASSESSING OFFICER OBSERVED THAT TH E TOTAL WORK IN PROGRESS AS ON 31-03-2003 IS ` 1,84,32,737/-. THE ASSESSEE HAS REDUCED AN AMOUNT OF ` 33,86,094/- AS GROSS PROFIT @ 18.37% ON THE ABOVE WORK IN PROGRESS AND AFTER REDUCING THE SAID GRO SS PROFIT THE TOTAL WORK IN PROGRESS SHOWN IN THE BOOKS OF ACCOUNT IS ` 1,50,46,643/-. ACCORDING TO THE LETTER DATED 23-11-2005 SUBMITTED BY ASSESSEE, THE OPENING WORK IN PROGRESS IS ` 1,00,45,429/- ( ` 1,20,84,000/- - ` 20,38,571/-). THE ASSESSING OFFICER CONCLUDED THAT THE ACTU AL WORK IN PROGRESS AS ON 01-04-2002 WAS ` 1,00,45,429/- AND NOT ` 1,20,15,000/- AT GROSS PROFIT RATE OF 16.87%. THUS, THE ASSESSING OFFICER MADE ADDITION OF ` 20,38,571/- ON ACCOUNT OF WORK IN PROGRESS. AGGRIEVED BY THE ASSESSMENT ORDER DATED 03-02-2006, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF I NCOME TAX (APPEALS). THE FIRST APPELLATE AUTHORITY VIDE IMPUGNED ORDER CONFIRMED THE FINDINGS OF THE ASSESSING OFFICER ON BOTH THE COUNTS. N OW, THE ASSESSEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL ASSAILING T HE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS). 4. SHRI S.N. PURANIK APPEARING ON BEHALF OF THE ASSESSEE SU BMITTED THAT AS PER THE ACCOUNTING PRINCIPLES CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LESS. HOWEVER, IN ASSESSMENT YEAR 2002-03 THE ASSESSEE WRONGLY TOOK THE CLOSING STOCK A T SELLING PRICE. THE ASSESSEE HAD TO TAKE THE CLOSING STOCK OF PREVIOUS YEAR AS OPENING STOCK OF THE NEXT FINANCIAL YEAR I.E. PERIOD RELEVANT TO THE ASSESSMENT YEAR 2003-04. ON REALIZING THE MISTAKE THE ASSESSEE REC TIFIED THE SAME BY REDUCING THE GROSS PROFIT FROM THE SELLING PRICE. DURING THE SCRUTINY 4 ITA NO. 1712/PN/2012, A.Y. 2003-04 ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER REDUCED THE GROSS PROFIT FROM THE OPENING STOCK AS ON 01-04-2002 AND MADE ADDIT ION TO THAT EXTENT. THE ADDITION OF GROSS PROFIT TO THE COST TO DETE RMINE THE CLOSING STOCK/OPENING STOCK IS NOT THE CORRECT METHOD AS PER THE ACCOUNTING PRINCIPLES. THE LD. AR SUBMITTED THAT FOR ARRIVING AT INCOME FOR ASSESSMENT YEAR 2002-03 THE STOCK VALUED AFTER INCLUDING THE GROSS PROFIT HAS ALREADY BEEN TAXED. THE CLOSING STOCK AS ON 31-03-2002 SHOULD HAVE BEEN TAKEN AS OPENING STOCK AS ON 01-04-2 002. THEREFORE, GROSS PROFIT I.E. ` 20,00,000/- SHOULD NOT HAVE BEEN REDUCED FROM OPENING STOCK. THE COMMISSIONER OF INCOME TAX (APPEALS) HA S WRONGLY OBSERVED THAT THE ASSESSEE HAS NOT BEEN REGULARLY FOLLOW ING THIS METHOD OF VALUATION. THE LD. AR PLACED ON RECORD THE CERTIFICATES FROM THE CHARTERED ACCOUNTANT AS ADDITIONAL EVIDENCE TO SHOW THA T THE ASSESSEE HAS BEEN FOLLOWING THE PARTICULAR METHOD OF ACCOUNTING IN RE SPECT OF STOCK IN ASSESSMENT YEARS 2003-04 TO 2006-07. THE LD. AR SUBMITTED THAT THE ASSESSEE CAN CHANGE THE METHOD OF VALUATION O F STOCK PROVIDED THE ASSESSEE CONSISTENTLY FOLLOWS THE METHOD ADOPTED AFT ER CHANGE. IN SUPPORT OF HIS SUBMISSIONS, THE LD. AR PLACED RELIANCE ON THE FOLLOWING DECISIONS: I. V.K.J. BUILDERS AND CONTRACTORS P. LTD. VS. COMMISSIONER OF INCOME TAX, 318 ITR 204 (SC); II. MELMOULD CORPORATION VS. COMMISSIONER OF INCOME TAX, 202 I TR 789 (BOM). 5. IN RESPECT OF SECOND GROUND RAISED IN THE APPEAL, TH E LD. AR SUBMITTED THAT THE ASSESSING OFFICER HAD MADE DISALLOWANCE OF ` 15,00,000/- I.E. 20% OF THE TOTAL LABOUR EXPENDITURE CLAIMED BY THE 5 ITA NO. 1712/PN/2012, A.Y. 2003-04 ASSESSEE. THE COMMISSIONER OF INCOME TAX (APPEALS) RESTRIC TED THE SAME TO ` 7,50,000/- I.E. 10% OF THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. SINCE, THE RECORDS RELATING TO LABOUR PAYMENTS WERE MAINTAINED AT WORKS SITE AND THE STAFF HANDLING THE PAYMEN TS WAS NOT WELL VERSED AND QUALIFIED IN MAINTAINING THE RECORDS, THERE WE RE SOME SMALL IRREGULARITIES IN MAINTAINING THE RECORDS. THE COMMISS IONER OF INCOME TAX (APPEALS) HAS MADE AD HOC DISALLOWANCE OF ` 7,50,000/- WHICH IS UNJUSTIFIED AND IS ON THE HIGHER SITE. THE LD. AR SU BMITTED THAT TOTAL DISALLOWANCE OF ` 50,000/- TO ` 75,000/- WOULD HAVE BEEN SUFFICE TO COVER ALL DISCREPANCIES. THE LD. AR PRAYED FOR MOD IFYING THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) IN RESPECT OF GROUND NO. 2. 6. MS. ANN KAPTHUAMA REPRESENTING THE DEPARTMENT VEHE MENTLY SUPPORTED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEA LS). THE LD. DR SUBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING INCO NSISTENT METHOD FOR RECORDING THE CLOSING STOCK. THE ASSESSEE HA S NOT BEEN ABLE TO SHOW FROM RECORDS THAT THE ASSESSEE HAS BEEN FOLLOWIN G ONE OF THE ACCEPTED METHODS OF VALUATION OF WORK IN PROGRESS REGU LARLY. IN SO FAR AS ADDITION MADE ON ACCOUNT OF LABOUR CHARGES IS CONCERN ED THE LD. DR SUBMITTED THAT THE ASSESSEE WAS NOT MAINTAINING PROPER RECORDS FOR THE PAYMENTS MADE TO THE LABOURERS. THE EXPENDITURE CLAIMED BY THE ASSESSEE ON ACCOUNT OF LABOUR PAYMENTS WAS ON THE HIGH ER SIDE. THE ASSESSING OFFICER HAD MADE DISALLOWANCE OF 20% OF THE LABOUR PAYMENTS WHICH WAS REDUCED TO 10% BY THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) HAS GRANTED SUFFICIENT RELIEF TO THE ASSESSEE. IN LIGHT OF THE FACT THAT THE ASSESSEE 6 ITA NO. 1712/PN/2012, A.Y. 2003-04 WAS NOT MAINTAINING PROPER RECORDS, NO FURTHER RELIEF SHOU LD BE GRANTED TO THE ASSESSEE. 7. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. WE HAVE ALSO EXAMINED THE DOCUMENTS PLACED ON RECORD AS A DDITIONAL EVIDENCE BY THE ASSESSEE IN THE FORM OF CERTIFICATES FROM THE CHARTERED ACCOUNTANTS. IN APPEAL, THE ASSESSEE HAS ASSAILED THE F INDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN CONFIRMING ADDITION OF ` 20,38,571/- ON ACCOUNT OF OPENING STOCK AND AD HOC DISALLO WANCE OF ` 7,50,000/- ON THE ACCOUNT OF LABOUR PAYMENTS. 8. IN SO FAR AS THE FIRST ISSUE RELATING TO METHOD OF VALUA TION OF STOCK IS CONCERNED, THE ASSESSEE HAS CONTENDED THAT IN THE A SSESSMENT YEAR 2002-03 THE ASSESSEE HAD WRONGLY TAKEN THE CLOSING ST OCK AT SELLING PRICE. THEREFORE, THE ASSESSEE WAS CONSTRAINED TO TAKE THE SAME VALUE AS OPENING STOCK IN THE NEXT FINANCIAL YEAR. AS PER THE A CCOUNTING PRINCIPLES CLOSING STOCK HAS TO BE TAKEN AT COST OR M ARKET PRICE, WHICHEVER IS LESS. THE ASSESSEE HAS FILED A CERTIFICATE FROM THE CHARTERED ACCOUNTANT STATING THAT THE ASSESSEE HAS B EEN VALUING STOCK AFTER REDUCING THE GROSS PROFIT PERCENTAGE AND THIS METH OD HAS BEEN REGULARLY FOLLOWED DURING THE PERIOD RELEVANT TO THE ASSE SSMENT YEARS 2003-04 TO 2005-06. SIMILAR CERTIFICATE HAS BEEN GIVEN BY ANOTHER CHARTERED ACCOUNTANT IN RESPECT OF ASSESSMENT YEAR 20 06-07. THE CONTENTION OF THE ASSESSEE IS THAT, THE ASSESSEE IS FOLLOWI NG REGULAR METHOD OF VALUING CLOSING STOCK YEAR AFTER YEAR. THE ASSE SSEE IN SUPPORT OF HIS SUBMISSIONS THAT THE FUNDAMENTAL PRINCIPLE OF 7 ITA NO. 1712/PN/2012, A.Y. 2003-04 ACCOUNTANCY THAT THE FIGURE OF THE CLOSING STOCK OF THE EARLIER YEAR HAS TO BE THE OPENING STOCK OF THE NEXT ACCOUNTING YEAR, HA S PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT OF INDIA IN THE C ASE OF V.K.J. BUILDERS AND CONTRACTORS P. LD. VS. COMMISSIONER OF INCOME TAX (SUPRA). IN SO FAR AS THE PRINCIPLE OF ACCOUNTANCY RELATING TO VALUATION OF CLOSING STOCK AND OPENING STOCK IS CONCERNED THERE IS NO QUARREL ON THE ISSUE. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS SU STAINED THE ADDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK ON TH E GROUND THAT THE ASSESSEE IS NOT CONSISTENTLY FOLLOWING THE METHOD OF V ALUATION OF STOCK. 9. THE ASSESSEE HAS ALSO PLACED RELIANCE ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF MELMOULD CORPORATION VS . COMMISSIONER OF INCOME TAX (SUPRA). IN THE SAID CASE THE HON'BLE HIGH COURT HELD THAT U/S. 145 OF THE ACT, THE ASSESSEE CAN A DOPT A METHOD OF VALUATION WHICH IS TO BE FOLLOWED BY IT REGULARLY. THE HON'B LE HIGH COURT REITERATED THE PRINCIPLE OF ACCOUNTANCY THAT THE V ALUE OF THE STOCK CAN BE DETERMINED AT COST PRICE OR MARKET, PRICE, WH ICHEVER IS LOWER AND THAT THE CLOSING STOCK MUST BE THE VALUE OF THE OPEN ING STOCK IN THE SUCCEEDING YEAR. THE HON'BLE COURT HAS FURTHER HELD TH AT THE ASSESSEE CAN OPT FOR CHANGE IN THE METHOD OF VALUATION OF THE CLOSIN G STOCK AT COST PRICE OR MARKET PRICE, WHICHEVER IS LOWER, PROVIDE D THE CHANGE IS BONAFIDE AND IS FOLLOWED REGULARLY THEREAFTER. WHENEVER THE RE IS A CHANGE IN THE METHOD OF VALUATION, THERE IS BOUND TO BE S OME DISTORTION IN THE CALCULATION OF PROFIT IN THE YEAR IN WHICH THE CHANGE TAKES PLACE. BUT IF THE CHANGE IS BROUGHT ABOUT BONAFIDE AND IS IN ACCO RDANCE WITH 8 ITA NO. 1712/PN/2012, A.Y. 2003-04 THE NORMALLY ACCEPTED ACCOUNTING PRACTICE, THERE IS NO R EASON WHY SUCH A CHANGE SHOULD NOT BE PERMITTED. 10. IN VIEW OF THE CERTIFICATES OF THE CHARTERED ACCOUNTA NT FILED BY THE ASSESSEE AS ADDITIONAL EVIDENCE AND THE DECISION RENDERED IN THE C ASE OF MELMOULD CORPORATION VS. COMMISSIONER OF INCOME TAX (SUPRA), WE DEEM IT APPROPRIATE TO REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR DE-NOVO APPRECIATION, IN ACCORDANCE WITH LAW. THE GROUND NO. 1 RAISED IN THE APPEAL IS THUS ALLOWED FOR STATISTICAL PURPOSE. 11. THE SECOND ISSUE IN THE APPEAL IS WITH REGARD TO AD HOC DISALLOWANCE OF ` 7,50,000/- ON LABOUR PAYMENTS. THE ASSESSEE IN HIS BOOKS OF ACCOUNT HAS SHOWN GROSS CONTRACT RECEIPTS TO THE TUNE OF ` 2,86,20,061/-. THE GROSS CONTRACT EXPENSES CLAIMED BY TH E ASSESSEE ARE TO THE TUNE OF ` 2,33,62,906/- WHICH INCLUDE LABOUR PAYMENTS OF ` 75,00,000/-. DURING THE COURSE OF SCRUTINY ASSESSMENT, TH E ASSESSING OFFICER HAS POINTED CERTAIN DEFECTS AND DISCREPANCIES IN MAINTAINING THE RECORDS RELATING TO LABOUR PAYMENTS. TO COVER DEFECTS A ND DISCREPANCIES THE ASSESSING OFFICER MADE AD HOC DISALLOWANCE OF ` 15,00,000/- I.E. 20% OF THE TOTAL LABOUR PAYMENTS. IN FIRST A PPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS) REDUCED THE DISALLOWA NCE TO ` 7,50,000/- I.E. 10% OF THE TOTAL LABOUR PAYMENTS. THE ASSE SSEE HAS ADMITTED THE FACT THAT MUSTER ROLLS FOR LABOUR ATTENDANCE WERE NOT PROPERLY MAINTAINED AND THERE WERE DISCREPANCIES DUE TO IGNORANCE ON THE PART OF THE EMPLOYEES MAINTAINING SUCH RECORDS. MOST OF THE VOUCHERS FOR THE EXPENSES WERE SELF MADE AND THE PAYME NTS WERE MADE IN CASH WHICH ARE NOT AMENABLE TO INDEPENDENT VERIFICATION. IN VIEW OF 9 ITA NO. 1712/PN/2012, A.Y. 2003-04 THE ABOVE FACTS SOME DISALLOWANCE IS CALLED FOR ON ACCOUNT OF DISCREPANCIES IN MAINTAINING THE RECORDS. WE ARE OF THE CONSIDERED OPINION THAT TO COVER ERRORS AND OMISSIONS AND TO MEET THE ENDS OF JUSTICE IT WOULD BE JUST AND PROPER IF DISALLOWANCE OF ` 5,00,000/- IS SUSTAINED. ACCORDINGLY, THIS GROUND OF APPEAL IS PARTLY ACCEPTED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED ON FRIDAY, THE 19 TH DAY OF FEBRUARY, 2016. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 19 TH FEBRUARY, 2016 RK *+,$-.'/'(- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-III, PUNE 4. ' / THE CIT-IV, PUNE 5. !*+ %%,- , ,- , . /01 , / DR, ITAT, A BENCH, PUNE. 6. + 2 34 / GUARD FILE. // ! % // TRUE COPY// #5 / BY ORDER, %6 ,1 / PRIVATE SECRETARY, ,- , / ITAT, PUNE