ACIT 15(2), MUMBAI V. MAHESH ENTERPRISES, MUMBAI

ITA 5059/MUM/2009

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71193 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 13-05-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 04-09-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Section: 44AD

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI , , BEFORE SHRI SANJAY ARORA, A.M. AND SHRI AMIT SHUKL A, J.M. ./ I.T.A. NO.5059/MUM/2009 ( ASSESSMENT YEAR: 2006-07) ASST. CIT 15(2), ROOM NO.113, MATRU MANDIR, TARDEO, GRANT ROAD, MUMBAI-400 007 / VS. MAHESH ENTERPRISES UMAN SHIKHAR, 13 TH ROAD, BEHIND KHAR TELEPHONE EXCHANGE, MUMBAI-400 052 ' ./# ./PAN/GIR NO. AAKFM 2800 J ( '$ /APPELLANT ) : ( %&'$ / RESPONDENT ) & %& ./ C.O. NO.56/MUM/2010 ( ASSESSMENT YEAR: 2006-07) MAHESH ENTERPRISES UMAN SHIKHAR, 13 TH ROAD, BEHIND KHAR TELEPHONE EXCHANGE, MUMBAI-400 052 / VS. ASST. CIT 15(2), ROOM NO.113, MATRU MANDIR, TARDEO, GRANT ROAD, MUMBAI-400 007 ' ./# ./PAN/GIR NO. AAKFM 2800 J ( %& /CROSS OBJECTOR ) : ( %&'$ / RESPONDENT ) ' ( ) / REVENUE BY : SHRI O. P. SINGH *+ ,- ( ) / ASSESSEE BY : SHRI K. SHIVARAM *' . ( / DATE OF HEARING : 29.07.2013 012 ( / / DATE OF PRONOUNCEMENT : 18.09.2013 2 ITA NO. 5059/M/09 & CO NO.56/M/10 (A.Y. 2006-07) MAHESH ENTERPRISES / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE REVENUE AND CROSS OBJECTIO N BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-XV, MUMBAI (CIT(A) FOR SHORT) DATED 24.06.2009, PARTLY ALLOWING THE AS SESSEES APPEAL CONTESTING ITS ASSESSMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 ( THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A.Y.) 2006-07 VIDE ORDER DATED 04. 12.2008. 2. THE ISSUE INVOLVED IN THE PRESENT APPEAL IS THE INVOCATION OF SECTION 145(3) OF THE ACT, AND THE ESTIMATION OF THE INCOME CONSEQUENT TH ERETO. IT WILL BE RELEVANT TO RECOUNT THE FACTS OF THE CASE. THE ASSESSEE, A PARTNERSHIP FIRM, IS A CIVIL CONTRACTOR, EXECUTING CONTRACTS FOR LABOUR AS WELL AS ON LABOUR PLUS MATE RIAL BASIS. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEES ACCOUNTS REVEALED A N ET PROFIT OF RS. 54.47 LACS ON A GROSS RECEIPT OF RS. 443.87 LACS, INCLUDING RS. 82.95 LAC S AGAINST LABOUR CONTRACT/S. THE ASSESSEE WAS OBSERVED IN THE ASSESSMENT PROCEEDING TO BE NOT MAINTAINING ANY STOCK REGISTER, THOUGH HAD SHOWN OPENING STOCK (OF MATERIALS) AT NI L AND CLOSING STOCK AT RS 87596/-. THERE WAS AS SUCH NO RECORD OR MANNER TO VERIFY OR ASCERTAIN THE CONSUMPTION OF MATERIALS. THE PURCHASES FOR THE PERIOD 01/4/2005 T O 07.06.2005 (RS. 24.70 LACS), WHEN COMPARED WITH THE SALES UP TO 09.06.2005, I.E., RS. 82.94 LACS, YIELDED A MATERIAL COST RATIO AT 29.77% , I.E., EVEN IF THE CLOSING STOCK AS ON 09.06.2005 WERE TO BE, THOUGH HIGHLY IMPROBABLE, ASSUMED AT NIL . THIS WAS AT A SIGNIFICANT VARIANCE WITH THE OVERA LL MATERIAL CONSUMPTION RATE OF 52.05% , WHILE THAT FOR THE SECOND PERIOD, I.E., 10.06.200 5 TO 31.03.2006, WORKED TO EVEN HIGHER AT 58.7% . THE ASSESSEE SOUGHT TO JUSTIFY ITS BOOK RESULTS ON THE BASIS OF ITS AGGREGATE STATISTICS I. E., OVERALL MATERIAL CONSUMPTION OF 52.07% AND NET PROFIT RATE AT 12.86%. THE ASSESSEES EXPLANATION WAS THAT IT HAD NOT BEEN MAINTAINING ANY STOCK REGISTER SINCE INCEPTION, SO THAT THIS WAS A REGULAR FEATURE OF THE METHOD OF ACCOUNTING BEING FOLLOWED. IN FACT, A BILL FOR RS.37.80 LACS, DATED 09.06.2005, TO M/S. DHAIRYAWAN 3 ITA NO. 5059/M/09 & CO NO.56/M/10 (A.Y. 2006-07) MAHESH ENTERPRISES DEVELOPERS (WHICH STANDS INCLUDED IN THE SALE OF RS . 82.94 LACS FOR THE PERIOD UP TO THAT DATE), WAS AN ADVANCE BILL, SO THAT SAME IS TO BE E XCLUDED WHILE COMPUTING THE CONSUMPTION RATE FOR THE FIRST PERIOD. DOING SO WOU LD INFLATE THE MATERIAL CONSUMPTION RATE FOR THE FIRST PERIOD TO 54.7% . NOT IMPRESSED, THE ASSESSING OFFICER (A.O.) INVOK ED SEC. 145(3) OF THE ACT. THE MATERIAL CONSUMPTION WA S ASSUMED BY HIM AT 36% (EXCLUDING VAT AT 4.52%), WORKING OUT THE EXCESS CONSUMPTION A T RS.40,66,771/-. THE CLOSING STOCK AS AT THE YEAR-END (31.03.2006) WAS TAKEN AT EQUIVA LENT TO ONE MONTHS PURCHASE; THAT FOR MARCH, 2006 BEING AT RS.16.90 LACS. EXCLUDING THE V ALUE OF THE STOCK AS DISCLOSED, THE DIFFERENCE IN CLOSING STOCK WAS CALCULATED BY HIM A T RS.16.02 LACS PLUS VAT (@ 4.52%). THE GROSS ADDITION MADE WAS FOR RS.74,25,295/-, WHI CH, BEING ARITHMETICALLY INCORRECT, WAS SUBSEQUENTLY RECTIFIED IN PURSUANCE TO A RECTIF ICATION MOVED BY THE ASSESSEE TO THAT EFFECT. THE SAME DID NOT FAVOR WITH THE LD. CIT(A) IN APPEA L. THE A.O. HAD IGNORED THE OVERALL BOOK RESULTS AND PROCEEDED ON THE BASIS OF AN IRRELEVANT CLASSIFICATION, I.E., PERIOD 1 AND PERIOD 2; APPLYING A 3-MONTH RATIO (PERIOD 1) TO THE NINE-MONTH RATIO (PERIOD 2). IT COULD WELL, I.E., WITH EQUAL JUSTIFICATION, BE THE OPPOSITE, SO THAT THE RATIO OF PERIOD 2 COULD BE APPLIED TO PERIOD 1. THOUGH A DIFFERENCE H AD BEEN FOUND OUT BY HIM, ALL THAT COULD BE SAID IS THAT THE MATTER REQUIRED FURTHER I NVESTIGATION, WHICH WAS NOT CARRIED OUT BY THE A.O., DECIDING THE MATTER SUPERFICIALLY, IN A CRYPTIC FASHION, WITHOUT PURSUING THE SAME TO ITS LOGICAL END. THE ASSESSEE HAD, BESIDES CONTRACT RECEIPT, LABOUR RECEIPT AT RS.82.95 LACS. THE GENUINENESS OF THE PURCHASES HAD NOT BEEN QUESTIONED, AND IN FACT EVEN OTHERWISE VERIFIED BY THE A.O. BY ISSUING SUMM ONS/REQUISITION TO ALL THE CREDITORS. AS SUCH, THE MATTER COULD ONLY BE DECIDED ON THE BA SIS OF PAST AND/OR FUTURE RESULTS. THE NET PROFIT RATE FOR THE IMMEDIATELY PRECEDING AND T HE IMMEDIATELY SUCCEEDING YEAR ARE MUCH LOWER, AT 7.9% AND 8.3% RESPECTIVELY. THE ENTI RE ADDITION WAS, ACCORDINGLY, DELETED BY HIM (REFER PARA 5 OF THE IMPUGNED ORDER). AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US, WHIL E THE ASSESSEES CROSS- OBJECTION THERETO IS LARGELY SUPPORTIVE, EMPHASIZIN G THE NON-ACCEPTANCE OF THE ASSESSEES EXPLANATION QUA THE BILL TO M/S. DHAIRYAVAN DEVELOPERS BEING AN AD VANCE BILL. 4 ITA NO. 5059/M/09 & CO NO.56/M/10 (A.Y. 2006-07) MAHESH ENTERPRISES 3. WE HAVE HEARD THE PARTIES, AND PURSUED THE MATER IAL ON RECORD. 3.1 THE FIRST ISSUE BEFORE US IS THE VALIDITY OF TH E INVOCATION OF SEC. 145(3) OF THE ACT BY THE A.O. WE FIND NO INFIRMITY THEREIN. THE ASSES SEE IS ADMITTEDLY NOT MAINTAINING ANY STOCK REGISTER, SO THAT THERE IS NO BASIS TO VERIFY THE MATERIAL CONSUMPTION, WHICH CONSTITUTES A VERY SIGNIFICANT PART OF ITS OPERATIN G COST. NOT ONLY THAT, IT IS ADMITTEDLY FOLLOWING THE METHOD OF WRITING OFF ITS PURCHASES FOR THE YEAR TO THE OPERATING STATEMENT, TREATING THE SAME AS CONSUMED . NOW THERE IS NO BASIS TO STATE THAT THE MATERIAL IS ACTUALLY CONSUMED AS SOON AS IT IS PURC HASED, OR THAT THE ASSESSEE MAINTAINS NO INVENTORY THEREOF. THE ACCOUNTS AS MAINTAINED ARE T HUS ADMITTEDLY INCONSISTENT WITH THE ACTUAL, OBTAINING STATE OF AFFAIRS, WHICH THE BOOKS OF ACCOUNT OF ANY ENTITY OR ENTERPRISE ARE SUPPOSED TO REFLECT. THERE IS NO BASIS WHATSOEV ER, EITHER IN LAW OR IN ACCOUNTANCY; THE LAW ONLY UPHOLDING THE ACCEPTED PRINCIPLES OF COMME RCIAL ACCOUNTING, FOR THE SAID CONCOCTED AND/OR ARBITRARY METHOD OF ACCOUNTING BEI NG FOLLOWED BY THE ASSESSEE. THAT THE METHOD HAS BEEN FOLLOWED FROM YEAR TO YEAR, DOES NO T IN MANNER MITIGATE THE DEFECT, OR JUSTIFY ITS ADOPTION. THE ASSESSEES BOOKS OF ACCOU NT, AS MAINTAINED, ARE THUS NOT AMENABLE TO YIELDING CORRECT OPERATING RESULTS, SO THAT THE SAME STAND RIGHTLY NOT ACCEPTED BY A.O., APPLYING SEC. 145(3). 3.2 THE NEXT ISSUE BEFORE US IS THE ESTIMATION OF I NCOME. THE ASSESSEES BOOKS OF ACCOUNT HAVING BEEN FOUND AS NOT RELIABLE IN EXPLAI NING THE DISCLOSED BOOK RESULTS, DEPENDING UPON THAT DERIVED THERE-FROM, AS, SAY, FO R PERIOD 1, IN DETERMINING THE OVERALL PROFIT RATE, WOULD BE INCORRECT . THERE IS ALSO NO QUESTION, THUS, OF APPLYING THE MA TERIAL CONSUMPTION RATE FOR OR OVER ONE PERIOD DURING THE YEAR TO ANOTHER. FURTHER, THOUGH THEREFORE THE QUESTION OF APPLYING THE RATIO OF PER IOD 2 (NINE-MONTH) TO PERIOD 1, AS STATED BY THE LD. CIT(A), DOES NOT ARISE, THERE IS EVEN OT HERWISE NO SCOPE FOR THE SAME. THIS IS AS THE LOGIC FOR THE REVERSE IS THAT IF THE PRODUCTION IS POSSIBLE AT A LOWER MATERIAL CONSUMPTION FOR ONE PERIOD (PERIOD 1), IT OUGHT TO BE SO FOR THE OTHER PERIOD/S AS WELL (OR AT LEAST WOULD NEED TO BE JUSTIFIED), SO THAT THE O PPOSITE WOULD NOT HOLD. FURTHER, THE A.O. HAS IN FACT NOT, AS CLAIMED BY LD. CIT(A), APPLIED THE RATIO OF ONE PERIOD TO ANOTHER; THE 5 ITA NO. 5059/M/09 & CO NO.56/M/10 (A.Y. 2006-07) MAHESH ENTERPRISES CONSUMPTION RATE FOR THE FIRST PERIOD BEING AT 30% (APPROX.), AS AGAINST THE APPLIED AVERAGE RATE FOR THE YEAR OF 36%, I.E., AT 25% HIGH ER, IMPLYING AN EVEN HIGHER RATIO FOR PERIOD 2. ALSO, HOW AND ON WHAT BASIS, ONE MAY ASK, DOES THE A.O. RECAST THE ASSESSEES PROFIT AND LOSS ACCOUNT ? RATHER, IF IT COULD BE VALIDLY SO DONE, THE SAME OUGHT TO HAVE BEEN RECAST BY THE FIRST APPELLATE AUTHORITY HIMSEL F. THERE IS AGAIN NO MERIT IN THE ARGUMENT QUA A COMPARISON WITH THE ASSESSEES BOOK RESULTS FOR THE OTHER YEARS. THIS IS FOR TWO REASON S. THE SAID BOOKS, SIMILARLY MAINTAINED, I.E., AS FOR THE CURRENT YEAR, ARE EQUALLY UNRELIAB LE. SECONDLY, A SIGNIFICANT PROPORTION OF THE ASSESSEES PROFIT FOR THE YEAR COMES FROM LABOU R CONTRACT RECEIPT; THE RATIO OF WHICH WOULD VARY FROM YEAR TO YEAR. TO GIVE A BROAD AND P ROXIMATE VIEW, ASSUMING THE LABOUR TO CONSTITUTE 25% OF TOTAL OUTPUT VALUE, THE WORK C ORRESPONDING TO THE LABOUR RECEIPT WOULD BE RS. 332 LACS, AS AGAINST RS. 361 LACS IN R ESPECT OF LABOUR PLUS MATERIAL CONTRACT/S, I.E., ALMOST AT PAR FOR THE CURRENT YEA R. NO MEANINGFUL COMPARISON ACROSS DIFFERENT YEARS COULD BE MADE DE HORS SUCH RECEIPT. CONTINUING FURTHER, WE ALSO FIND NO BASIS IN T HE A.O.S ESTIMATION OF MATERIAL CONSUMPTION AT 36%. EQUALLY UNJUSTIFIABLE IS HIS SE PARATE ADDITION TOWARD CLOSING STOCK, WHICH ARISES AS A BY-PRODUCT TO THE FINDING OF AN A CTUAL LOWER MATERIAL CONSUMPTION. IN FACT, NEITHER ANY SEPARATE ADDITION CAN BE SUSTAINE D NOR THERE IS ANY WARRANT FOR ALLOWING THE ASSESSEE, AS CLAIMED BY IT, CREDIT FOR THE CLOS ING STOCK. THE ASSESSEE WOULD ALSO HAVE, SIMILARLY, OPENING STOCK, WHICH HAS TO BE NECESSARI LY TAKEN INTO ACCOUNT IN DETERMINING THE PROFIT FOR THE YEAR. IN FACT, THE OPENING STOCK BEING TAKEN AT NIL, I.E., THE VALUE OF THE CLOSING STOCK AS REFLECTED AND ACCEPTED FOR THE IMM EDIATELY PRECEDING YEAR, NO OPENING STOCK FOR THE YEAR COULD BE TAKEN WITHOUT FIRST SUS TAINING AN ADDITION TOWARD THE SAME UNDER SECTION 69/69A OF THE ACT. 3.3 SECTION 145(3) MANDATES FOR MAKING THE ASSESSME NT IN THE MANNER AS PROVIDED IN SEC. 144, I.E., ACCORDING TO THE BEST JUDGMENT OF T HE ASSESSING AUTHORITY, TAKING ALL THE RELEVANT MATERIAL INTO ACCOUNT. THE ASSESSEE HAS RE LIED ON CASE LAW, I.E., KESHARBHAI GHAMARBHAI CHAUDHARY VS. ITO [2011] 141 TTJ (AHBD) (UO) 94, TO THE EFFECT THAT 6 ITA NO. 5059/M/09 & CO NO.56/M/10 (A.Y. 2006-07) MAHESH ENTERPRISES UNDER THE CIRCUMSTANCE OF REJECTION OF BOOKS OF ACC OUNT, THE PRESCRIPTION OF SEC. 44AE; THE ASSESSEE IN THAT CASE BEING A TRANSPORT OPERATO R, IS A GOOD GUIDELINE FOR THE PURPOSE OF ESTIMATION OF INCOME. THE PRESUMPTIVE PROVISION IN THE CASE OF CIVIL CONTRACTORS IS SECTION 44AD, WHICH PROVIDES FOR A NET PROFIT RATE OF 8%. T HE MATTER IS PURELY FACTUAL, THOUGH THE PRESCRIBED PRESUMPTIVE STATUTORY RATE, APPLICABLE F OR ASSESSEES WITH A TURNOVER OF UP TO RS. 40 LACS, WITHOUT DOUBT PROVIDES A GOOD GUIDELIN E. THE APEX COURT IN BRIJ BUSHAN LAL PURDHUMAN KUMAR VS. CIT [1978] 115 ITR 524 (SC), APPROVED A PROFIT RATE OF 10%. THE TRIBUNAL HAS IN SUCH CASES UPHELD PROFIT RATES VARY ING FROM 8% UPWARDS TO AS MUCH AS 20%, OR EVEN HIGHER. IN OUR VIEW, A NET PROFIT RATE OF 10% ON THE ASSESSEES CONTRACT RECEIPT OF RS.360.86 LACS, I.E., INVOLVING MATERIAL CONSUMPTION, WOULD BE A REASONABLE ESTIMATE. QUA ITS LABOUR RECEIPT OF RS. 82.95 LACS, WE CONSIDER A NET PROFIT RATE OF 20%, IN VIEW OF A MUCH LOWER BASE, AS APPROPRIATE UNDER THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. THE A.O. IS DIRECTED TO WORK OUT THE ASSESSEE S INCOME FOR THE YEAR BY APPLYING THE SAID PERCENTAGES. NO OTHER ADDITION IS SUSTAINABLE. WE DECIDE ACCORDINGLY. 3.4 AS REGARDS THE ASSESSEES CROSS OBJECTION, WE F IND IT TO HAVE NO LEGS TO STAND ON, IN VIEW OF OUR HAVING UPHELD THE REJECTION OF THE ASSE SSEES ACCOUNTS UNDER SEC. 145(3) OF THE ACT. IN FACT, THERE IS NO BASIS TO STATE THAT T HE BILL TO M/S. DHAIRYAWAN DEVELOPERS WAS AN ADVANCE BILL. AGAIN, THE CO, IT WOULD BE NOTED, IS RENDERED LARGELY INCONSEQUENTIAL IN VIEW OF OUR UPHOLDING A PROFIT RATE MARGINALLY OVER (I.E., 2%) THE PRESUMPTIVE PROFIT RATE U/S. 44AD OF 8% , BEING PLEADED BY THE ASSESSEE ITSELF, WHILE, FIRS TLY, THE DISCLOSED PROFIT RATE IS ITSELF CLOSE TO 13% AND, SECONDLY, THE DIFFERENCE IN THE MATERIAL CONS UMPTION RATE AND, THUS, IN THE PROFIT RATE, ON THE ACCOUNT OF TH E SAID BILL IS AS MUCH AS ABOUT 25% . THE ASSESSEES C.O. IS, THEREFORE, WHOLLY WITHOUT MERIT . WE DECIDE ACCORDINGLY. 7 ITA NO. 5059/M/09 & CO NO.56/M/10 (A.Y. 2006-07) MAHESH ENTERPRISES 4. IN THE RESULT, THE REVENUES APPEAL IS PARTLY AL LOWED, AND THE ASSESSEES CROSS OBJECTION IS DISMISSED. -2 3 ' ( ' 4 , 5 *+ ,- ( %& - ( 67 ORDER PRONOUNCED IN THE OPEN COURT ON SEPTEMBER 18, 2013 SD/- SD/- (AMIT SHUKLA) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER 8. MUMBAI; 9* DATED : 18.09.2013 ROSHANI ! ' #$%& '&$ / COPY OF THE ORDER FORWARDED TO : 1. '$ / THE APPELLANT 2. %&'$ / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. :'; < %*=+ , / =+2 , 8. / DR, ITAT, MUMBAI 6. < >, ? . / GUARD FILE ! ( / BY ORDER, ) / (* + (DY./ASSTT. REGISTRAR) , 8. / ITAT, MUMBAI