Sri Srimanta Kar, Rourkela V. ACIT, Rourkela Circle, Rourkela

ITA 435/CTK/2012

• Counselvise Citation: 43522114 RSA 2012
• Duration Of Justice: 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 25-07-2012
• Court: TRIBUNAL
• Department Lawyers: A BHATTACHARJEE
• Assessee Lawyers: P R MOHANTYD K SWAINARS
• Keywords: Business income

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK ( ) BEFORE . . , , HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER. /AND . . . , S HRI K.S.S.PRASAD RAO, JUDICIAL MEMBER / I.T.A.NO. 435/CTK/2012 / ASSESSMENT YEAR 2008 - 09 SRI SRIMANTA KAR, PLOT NO.148/587, NEW CONTRACTORS COLONY, ROURKELA PAN:ALHPK 5514 H - - - VERSUS - ASST.COMMISSIONER OF INCOME - TAX, ROURKELA. ( /APPELLANT ) ( / RESPONDENT ) / FOR THE APPELLANT : / SHRI P.R.MOHANTY/D.K.SWAIN, ARS / FOR THE RESPONDENT: / SHRI A.BHATTACHARJEE, DR / DATE OF HEARING: 22.08.2012 / DATE OF PRONOUNCEMENT: 31.08.2012 / ORDER . . , , SHRI K.K.GUPTA, ACCOUNTANT MEMBER. THIS APPEAL BY THE ASSESSEE IS ON THE SOLITARY GROUND THAT THE AUTHORITIES BELOW HAVE ERRED IN BRINGING TO TAX A SUM OF 2 1,94,430 ON THE GROUND THAT THE CLOSING STOCK FOR THE CORRESPONDING PURCHASES HAD NOT BEEN RENDERED TO TAX BY THE ASSESSEE ON THE LEARNED ASSESSING OFFICER S SPECIFIC FINDING THAT THE PURCHASES HAD BEEN MADE FOR THE PARTICULAR ITEMS. 2. THE BRIEF FACTS AS HAVE BEEN BROUGHT ON RECORD ARE THAT THE ASSESSEE IS AN INDIVIDUAL AND THE PROPRIETOR OF THREE SEPARATE BUSINESS ENTITIES BY NAME BUT ALL AS INDIVIDUAL NAME FOR THE PURPOSE OF CONTRACT WORK RENDERED BY THE ASSESSEE WHEN PURCHASES MADE FOR THE CONTRACTEES W ERE DECLARED BY THE ASSESSEE AS PROPRIETOR OF M/S.MISHRA ELECTRICAL SERVICES. THE ASSESSING OFFICER VERIFYING THE P & L ACCOUNT OF M/S.MISHRA ELECTRICAL SERVICES NOTED THAT PURCHASES HAVE BEEN MADE IN M/S.MIDAS ENGINEERS & CONTRACTORS WHEN I.T.A.NO. 435/CTK/2012 2 THE SALES WERE O NLY 4,29,675 AGAINST PURCHASE OF MATERIALS AMOUNTING TO 26,14,062. HE COMPUTED THE COST OF SALES AND CONSIDERED THE BALANCE PURCHASE AS CLOSING STOCK NOT DECLARED INSPITE OF ITS PRESENCE AS PER THE DULY AUDITED FINANCIAL STATEMENTS FURNISHED BY THE ASSES SEE BEFORE US. HE PASSED THE ASSESSMENT ORDER U/S.143(3) BY BRINGING TO TAX ALONG WITH NET INCOME AMOU NTING TO 5,92,710 DECLARED BY THE ASSESSEE AND THE CLOSING STOCK DIFFERENCE AS MENTIONED ABOVE AMOUNTING TO 21,94,430. 3. AGGRIEVED THE ASSESSEE APPEAL ED BEFORE THE FIRST APPELLATE AUTHORITY , WHO CONSIDERED THE ASSESSEE S CONTENTION WHEN HE TRIED TO ISOLATE THE INDIVIDUAL PROPRIETARY CONCERN CULMINATING INTO THE NET INCOME SHOWN BY THE ASSESSEE BEING AN INDIVIDUAL. HE CONSIDERED THAT THE ISSUE IS ONLY W ITH RESPECT TO M/S.MIDAS ENGINEERS & CONTRACTORS WHICH SALES DID NOT COMMENSURATE WITH THE PURCHASE OF MATERIALS RESULTING IN CLAIM OF LOSS AMOUNTING TO 21,94,430 WHICH OUGHT TO BE THE CLOSING STOCK AVAILABLE TO IT AS PER ASSESSEES OWN FINANCIAL STATEMENTS. BY COMMENTING ON THE MAINTENANCE OF ACCOUNTS, THE LEARNED CIT(A) CONFIRMED THE ASSESSING OFFICERS ABILITY TO DETECT THE FICTITIOUS CLAIM OF LOSS AMO UNTING TO 21,94,430 WHICH AS PER ACCOUNTING STANDARD IT SHOULD HAVE BEEN TRANSFERRED TO THE PURCHASES SOUGHT TO HAVE BEEN MADE FOR THE CONTRACT BUSINESS. HE COMMENTED THAT THE COST OF MATERIAL AS SHOWN IN THE P & L ACCOUNT WAS RIGHTLY BROUGHT TO TAX BEIN G THE STOCK DIFFERENCE. 4. THE LEARNED COUNSEL FOR THE ASSESSEE INITIATING HIS ARGUMENTS SUBMITTED THAT THE ASSESSEE BEING AN INDIVIDUAL WAS HOLDING ONE PAN . THE ASSESSEE WHO HAPPENS TO BE AN ELECTRICAL ENGINEER BY QUALIFICATION, SOUGHT A CAREER RELATED TO ELECTRICAL ENGINEERING/CONTRACT JOB INSTEAD OF GETTING EMPLOYED IN ANY ORGANIZATION DUE TO SOME FAMILY COMPULSION. BUT IN COURSE OF TIME, HE FOUND OUT THAT EXCLUSIVE ELECTRICAL JOBS ARE HARD TO COME BY, I.T.A.NO. 435/CTK/2012 3 WHEREAS, CIVIL AND/OR MECHANICAL JOBS ARE IN OFFER W HICH INCLUDES ELECTRICAL JOB. THEREFORE, THE ASSESSEE STARTED EXECUTION OF WORKS CONTRACT AND ELECTRICAL JOB WORK ALONG WITH SUPPLY OF MATERIALS IN THE NAME OF M/S. SRIMANTA KAR, M/S. MISHRA ELECTRICAL SERVICES & M/S. MIDAS ENGINEERS & CONTRACTORS RESPECTI VELY AS THREE DISTINCT ACTIVITIES ASSUMING THIS WOULD BE DISCIPLINE D/ PROFESSIONAL WAY TO DO SO. ALTHOUGH THE ASSESSEE WAS HAVING THREE DISTINCT ACTIVIT IES IN THREE DIFFERENT NAMES BUT, BEING THE PROPRIETOR HE WAS AWARDED A SINGULAR TIN (TRADERS IDENTIFICAT ION NUMBER) BY THE SALES TAX AUTHORITIES BEING A REGISTERED DEALER, BUT THE SALES TAX DEPARTMENT ISSUED WAY BILLS IN ALL THE THREE NAMES FOR PROCUREMENT OF MATERIAL GOODS. D URING THE YEAR UNDER CONSIDERATION THE ASSESSEE EXECUTED WORKS CONTRACT OF 1,11,11 ,955 IN THE NAME OF M/S. SRIMANTA KAR. THIS CONSTRUCTION JOB REQUIRED ANTI - CORROSION COMPOUNDS (ROOF TAR FELTING MATERIALS) TO BE EXECUTED AT SITE AT L&T, KANSBAHAL. AT THAT JUNCTURE WAY BILLS IN THE NAME OF M/S. SRIMANTA KAR WAS NOT READILY AVAILABLE. THU S, AS THE MATERIALS WERE URGENTLY REQUIRED TO BE PROCURED FOR THE CONSTRUCTION WORK, WAY BILL AVAILABLE IN THE NAME OF M/S. MIDAS ENGINEERING & CONTRACTORS WERE UTILIZED AND THE SAME WAS REFLECTED TOWARDS PURCHASES FOR M/S. MIDAS ENGINEERING & CONTRACTORS AS PER THE WAY BILL ALTHOUGH THE MATERIALS PURCHASED WERE USED IN THE WORKS CONTRACT OF M/S. SRIMANTA KAR. THE CHARTERED ACCOUNTANT WHO HAD BEEN ENTRUSTED WITH THE RESPONSIBILITY TO CONDUCT AUDIT OF ACCOUNTS, FOR THE REASONS BEST KNOWN TO HIM PREPARED THR EE SETS OF P/L ACCOUNTS & BALANCE SHEET FOR THE THREE CONCERNS AND MADE A CONSOLIDATED P/L ACCOUNTS ON THE BASIS OF WHICH RETURN WAS FILED , A LTHOUGH HE PREPARED A SINGLE BALANCE SHEET & P/L ACCOUNT IN THE PREVIOUS YEAR. IN THE YEAR UNDER CONSIDERATION M/S. MIDAS ENGINEERS & CONTRACTORS GOT A SUPPLY ORDER OF ONLY 4,29,674.50 AND THERE WAS NO REASON & OCCASION TO PURCHASE MATERIALS I.T.A.NO. 435/CTK/2012 4 WORTH OF 26,2 4,104 AND THE EXCESS PURCHASE AMOUNTING TO 21,94,430 WAS MADE FOR EXECUTION OF WORKS CONTRACT AT L&T SITE. AS PER ACCOUNTING STANDARD THE SAME SHOULD HAVE BEEN A STOCK TRANSFER BUT INADVERTENTLY THE CHARTERED ACCOUNTANT COMMITTED A BLATANT ERROR OF A CCOUNTING, FOR WHICH THE ASSESSEE SHOULD NOT BE PENALIZED. AS A MATTER OF FACT THE ASSESSING OFFICER ON THE BODY OF THE ASSESSMENT ORDER WHILE DEALING WITH THE ALLEGED STOCK DIFFERENCE MADE SOME RELEVANT OBSERVATIONS WHICH IS REPRODUCED HEREUNDER FOR BETTER APPRECIATION OF FACTS: ON EXAMINATION OF THE AUDITED P & L A/C. FOR THE YEAR UNDER CONSIDERATION, IT IS SEEN THAT A SSESSEE IS THE PROPRIETOR OF THREE CONCERNS. FURTHER, IT IS SEEN THAT IN RESPECT OF THE CONCERN MIDAS ENGINEERING & CONTRACTORS, WHICH IS DEALING WITH TRADER OF WELDING RODS AND WATER PROOFING MATERIALS, ASSESSEE HAS SHOWN TOTAL PURCHASES AT 26,14,061 WH EREAS TOTAL SALES EFFECTED IS TO THE TUNE OF 4,29,674. AND THE BALANCE AMOUNT OF 21,94,430 HAS BEEN SHOWN AS GROSS LOSS INSTEAD OF SHOWING THE SAME AS CLOSING STOCK. XX XX XX XX ON GOING THROUGH THE ABOVE SUBMISSION OF THE ASSESSEE IN RESPONSE TO THE SHOW CAUSE LETTER, IT IS SEEN THAT THE EXPLANATION OFFERED BY THE ASSESSEE IS NOT ACCEPTABLE. IF ASSESSEE HAS SHOWN HUGE PURCHASES AS AGAINST MEAGER SALE, THE BALANCE AMOUNT SHOULD BE SHOWN AS CLOSING STOCK AND NOT AS GROSS LOSS. IT MEANS, ASSESSE E DOES NOT FOLLOW PROPER ACCOUNTING STANDARDS FOR MAINTENANCE OF HIS BOOKS OF ACCOUNT. XX XX XX XX AS ASSESSEE HAS NOT PROPERLY ADOPTED THE ACCOUNTING STANDARD AND THE VALUATION OF CLOSING STOCK ADOPTED BY THE ASSESSEE IS NOT ACCEPTABLE AS PROPER, THE BALANCE AMOUNT OF 21,94,430 WHICH THE ASSESSEE HAS SHOWN AS GROSS LOSS IS TREATED AS CLOSING STOCK DIFFERENCE WHICH THE ASSESSEE COULD NOT RECONCILE AND ACCORDINGLY ADDED BACK TO THE TOTAL INCOME. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED TH AT ALTHOUGH IT WAS EXPLAINED TO THE ASSESSING AUTHORITY DURING THE COURSE OF THE ASSESSMENT PROCEEDING THAT IT IS NOT A CASE OF IMPROPER MAINTENANCE OF BOOKS OF ACCOUNT BUT IS A CASE OF IMPROPER TREATMENT BY THE AUDITORS IN THE AUDITED ACCOUNTS I.T.A.NO. 435/CTK/2012 5 IN GROSS VI OLATION TO THE BASIC PRINCIPLE OF ACCOUNTING STANDARDS. IT WAS ALSO EXPLAINED THAT THE EXCESS STOCK OF 21 ,94,430 , IN FACT WAS MATERIALS PURCHASED AND UTILIZED IN THE WORKS CONTRACT OF M/S SRIMANTA KAR AND INSTEAD OF STOCK TRANSFER THE AUDITORS HAVE INADVERTENTLY SHOWN IT AS A GROSS LOSS. IN ANY CASE, IF WE RECAST THE ACCOUNTS THE RESULTANT PROFIT FIGURE W ILL BE SAME, WHICH WILL BE ABSOLUTELY CLEAR FROM THE FOLLOWING SIMPLE EXERCISE AS UNDER: M/S SRIMANTA KAR GROSS CIVIL CONTRACT RECEIPTS - 1,11,11,955 LESS: PROFIT @ 8% - 8,88,956 LABOUR - 18,71,322 --------------------------------- MATERIALS REQUIRED - 83, 51,677 APPROXIMATELY WHICH ALSO INCLUDES ADMINISTRATIVE OTHER INCIDENTAL EXPENSES. PURCHASE DURING THE YEAR - 70,20.182 OPENING STOCK - 4,26,220 STOCK TRANSFER (M/S.MIDAS ENGG. & CON). 21,94,430 LESS: CLOSING STOCK 15,39,360 ------------------------------- MA TERIALS CONSUMED 81,01,472 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ABOVE CALCULATION MAKES IT ABUNDANTLY CLEAR THAT INDEED THE PURCHASE OF MATERIAL BY M/S.MIDAS ENGINEERS & CONTRACTORS AMOUNTING TO 21,94,430 HAS BEEN UTILIZED IN TH E WORKS CONTRACT OF M/S.SRIMANT KAR AND THIS INADVERTENT MISADVENTURE BY THE AUDITORS DOES NOT CHANGE THE RESULTANT PROFIT FIGURE AS PROVIDED BELOW IN THIS TABULAR FORMAT. I.T.A.NO. 435/CTK/2012 6 I.T.A.NO. 435/CTK/2012 7 ON THE BASIS OF ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IF ONE LOOKS INTO THE TOTALITY OF THE MATTER ASSUMING AND NOT ADMITTING FOR A MOMENT THAT BOOKS ARE NOT PROPERLY MAINTAINED STILL THEN THE ADDITION OF 21,94,430 TOWARDS DISCREPANCY IN CLOSING STOCK IS UNCALLED FOR ON THE GROUND THAT THE ASSESSEE HAD NOTHING TO GAIN BY DISGUISING IT PARTICULARLY WHEN PURCHASE HAS BEEN DULY DISCLOSED. HE, THEREFORE, PRAYED FOR DELETION OF THE ADDITION OF 21,94,430 MADE ON ACCOUNT OF ALLEGED CLOSING STOCK DIFFERENCE. 5. THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHO RITIES BELOW FOR HIS PART OF SUBMISSIONS. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW AND THE MATERIAL AVAILABLE ON RECORD. ON CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO FIND THAT THE LEARNED CIT(A) CONSIDERED THE CASE OF THE ASSESSEE IN ITS ENTIRETY TO CONFINE HIMSELF TO THE PROPOSITION THAT THE HUGE PROFIT SHOWN BY THE ASSESSEE AS A CONTRACTOR WAS REDUCED FROM THE LOSS AS WAS AUDITED AND DISCLOSED TO THE ASSESSING OFFIC ER IN THE CASE OF M/S.MIDAS ENGINEERS & CONTRACTORS . THE CONTRACTOR BUSINESS WAS BEING CONDUCTED AS M/S.SRIMANT KAR WHEN THE PROFIT SHOWN WAS AT 26,73,070. IN OTHER WORDS, ACCEPTING THE INCOME AT 5,92,710 AS DECLARED BY THE ASSESSEE WAS AN EFFORT TO ACC EPT THE LOSS DECLARED IN M/S.MIDAS ENGINEERS & CONTRACTORS CLUBBED WITH HUGE PROFIT MADE IN M/S. SRIMANT KAR. THE DIFFERENCE BETWEEN THE TWO W A S ACCEPTABLE TO THE ASSESSING OFFICER INSOFAR AS THE DETAILS FURNISHED BEFORE THE LEARNED CIT(A) WHO DID NOT CONSI DER THE FACT THAT THE STOCK SO COMPUTED WAS APPEARING ELSEWHERE AS PROFIT . THE CLOSING STOCK WHICH HE COMPUTED ON I.T.A.NO. 435/CTK/2012 8 THE BASIS OF SALES IN THE CASE OF M/S.MIDAS ENGINEERS & CONTRACTORS WOULD HAVE RESULTED IN FINDING THIS AMOUNT EMBODIED IN THE PROFIT MADE AND DECLARED IN M/S.SRIMANTA KAR . CLOSING STOCK DOES NOT FORM PART OF BOOKS OF ACCOUNT AND THEREFORE CANNOT BE SAID THAT THE PURPORTED CLOSING STOCK HAD NOT BEEN SHOWN IN THE BOOKS OF ACCOUNT. THE CLOSING STOCK DECLARED BY M/S.SRIMANTA KAR BY THE ASSESSEE AS INDIVIDUAL WAS 15,39,360 WHICH GAVE A PROFIT OF 26,73,070 TO UNIT M/S.SRIMANTA KAR COMPENSATED THE ERROR OR MISTAKE COMMITTED IN DECLARING PURCHASES OF M/S.SRIMANTA KAR IN M/S.MIDAS ENGINEERS & CONTRACTORS AS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASS ESSEE . THE LEARNED CIT(A) THEREFORE TOOK AN UNILATERAL VIEW IN THE MATTER INSOFAR AS THE STOCK COULD BE SAID TO HAVE DISAPPEARED FROM THE BOOKS OF ACCOUNT BECAUSE IT WAS NEVER TO BE APPEARING IN THE BOOKS OF ACCOUNT AS THE CLOSING STOCK FOR SEPARATE BUSIN ESSES . CLOSING STOCK DOES NOT FORM PART OF CASH AND BANK TRANS AC TIONS AND HAVE TO BE DECLARED AFTER PHYSICAL VERIFICATION BY THE INDIVIDUAL . THEREFORE, THE LOSS COULD NOT BE DETERMINED AGAINST THE PRINCIPLES OF ACCOUNTING OF MATERIAL PURCHASED ERRONE OUSLY BOOKED IN A CONCERN BUT BELONGING TO OTHER CONCERN. IF THAT BE SO, THE HUGE PROFIT IN M/S.SRIMANTA KAR RETURNED BY THE ASSESSEE AS A CONTRACTOR AT 33% OF THE GROSS RECEIPTS WOULD NOT HAVE BEEN READILY ACCEPTABLE TO THE ASSESSING OFFICER. THE LEARNED CIT(A) THEREFORE, DID NOT COMMENT ON THE HUGE PROFIT RETURNED BY THE ASSESSEE IN ITS CONTRACT BUSINESS WAS ALSO ACCEPTABLE TO THE ASSESSING OFFICER WHEN HE CHOSE TO REDUCE THE HUGE PROFIT BY THIS PURPORTED CLOSING STOCK NOT FOUND AT THE TIME IN THE BOOKS OF ACCO UNT. IN THIS VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW THAT THIS AMOUNT CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE IN THE IMPUGNED ASSESSMENT YEAR AS MISSING CLOSING STOCK OR AS UNDERSTATEMENT OF PROFITS. THE ORDER OF I.T.A.NO. 435/CTK/2012 9 THE LEARNED CIT(A) , THEREFO RE IS SET ASIDE AND THE ADDITION OF 21,94,430 MADE ON ACCOUNT OF ALLEGED CLOSING STOCK DIFFERENCE IS HEREBY DELETED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. SD/ - SD/ - ( . . . ) , (K.S.S.PRASAD RAO), JUDICIAL MEMBER ( . . ) , , (K.K.GUPTA), ACCOUNTANT MEMBER. ( ) DATE: - COPY OF THE ORDER F ORWARDED TO: 1 . / THE APPELLANT : SRI SRIMANTA KAR, PLOT NO.148/587, NEW CONTRACTORS COLONY, ROURKELA 2 / THE RESPONDENT: ASST.COMMISSIONER OF INCOME - TAX, ROURKELA. 3 . / THE CIT, 4 . ( )/ THE CIT(A), 5 . / DR, CUTTACK BENCH 6 . GUARD FILE . / TRUE COPY, / BY ORDER, APPENDIX XVII SEAL TO BE AFFIXED ON THE ORDE R SHEET BY THE SR. P.S./P.S. AFTER DICTATION IS GIVEN 1. DATE OF DICTATION 28.08.2012 . 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 29.08.2012 OTHER MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.... 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR . P.S./P.S . 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 31.08.2012 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER ................ 9. DATE OF DESPATCH OF THE ORDER .. ( ), (H.K.PADHEE), SENIOR.PRIVATE SECRETARY.