Shri Devasamparambil Hassainar Kutty Vs ACIT (ITAT Jaipur)
Revenue has not disputed the fact that the FDRs taken by the assessee are for the purpose of furnishing the security/guarantee to the companies those have awarded the contract to the assessee. Therefore, these FDRs were furnished as a performance guarantee by the assessee. Once the FDRs in question were obtained for the purpose of furnishing the performance guarantee for taking the contracts, then the interest on such FDRs has a direct nexus with the business activity of the assessee and consequently the same has to be treated as business income of the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals by the assessee arc directed against two separate orders of Id. CIT (Appeals), Kota dated 16.09.2011 and 25.03.2015 arising from assessment order passed under section 143(3) and penalty levied under section 271(1Xc) of the IT Act respectively for the assessment year 2009-10. In the quantum appeal, the Messee has raised the following grounds :-
“1. That on the facts, in the circumstances of the case and in law, the Id. Lower authorities grossly erred in rejecting the books of accounts of the assessee appellant u/s 115(3) of the Income-tax Act
1.1. That the Id. Commissioner or Income-tax (appeals) grossly-erred in applying 11% NP Rate on gross receipts of Rs. 5,45;19,491/- and in further enhancing the trading addition by Rs.1949,1.68/- u/s 251(2) of the Income-tax Act and in computing the total business income at Rs. 59,97,144/- as against Rs. 25,42,865/- declared by the assessee appellant, in turn making total addition of Rs. 34,54,279/- against the assessee appellant.
1.2. That the Id. Assessing Officer grossly erred in applying 8% NP Rate on gross receipts of Rs. 5,15,19,491/- and on uncertified work in progress of Rs. 5,00,000/- and in computing total business income at Rs. 41,67,451/- as against Rs. 25,42,865/-declared by the assesses appellant, in turn making total addition of Rs. 16,24,586/- against the assessee appellant.
2. That on the fact, in the circumstances of the case and in law, the Id. Lower authorities grossly erred in treating the interest earned on Fixed Deposit Receipt as Income Chargeable to tax under the head Income from Other Sources and in not allowing the set-off against interest paid by the assessee appellant to the bank, even when limits were availed from the bank against the FDRs pledged with the bank.
3. The appellant craves leave to add, alter, modify or amend any ground on or before the date of hearing.”
Ground no. 1 is regarding rejection of books of account under section 145(3) of the IT Act.
2. At the time of hearing, the Id. counsel for the asscssee has stated at bar that the assessee does not press this ground of appeal and the same may be dismissed as not pressed. The Id. D/R has raised no objection if the assessee’s ground no. 1 is dismissed as not pressed. Accordingly, the ground no. 1 of the assessee’s appeal is dismissed being not pressed
Ground No. 1.1 and 1.2 are regarding estimation of income by the AO by applying 8% NP rate and enhancement made by the Id. CIT (A) by applying 11% NP rate on gross receipts.
3. The assessee is an Individual and engaged in the business of contract of labour supply, civil contract, mechanical and electrical contract. The assessee is carrying on business under the name and style of M/s. H.D. Kutty & Sons (Engineers & Contractors) for the last several yeari. During the year under consideration, the assessee has got executed various contracts awarded by Kota Thermal Power, RAAP Rawatbhata, Chanderiya near Udaipur, Abucha Distt. Bhilwara, all in the State Of Rajasthan, Bhav Nagar in the. State of Gujarat and Tarapur Boisal in the State of Maharastra with a total turnover or Rs. 5,45,19,491/-. The assessee filed his return of income on 30.09.2009 declaring total income of Rs. 24,43,450/-. During the scrutiny assessment, on examination Of books of account, the AO found various deficiencies/discrepancies and consequently invoked the provisions of section 145(3) of the IT Act whereby the book result of the assessee was rejected by the AO. The AO then estimated the income of the assessee by adopting NP at 8% of the gross receipts and thereby an addition of Rs. 16,24,586/- was made. The assessee challenged the action of the AO before the Id. CiT (A). The Id. CIT (A) upheld the rejection of books of account under section 145(3) of the IT Act and further doubted the sub-contract payment made by the assessee to the sub-contractors. The Id. CIT (A) has undertaken the exercise to examine the sub-contractors and got recorded their statement. Since there were discrepancies in the statements vis-a-vis the receipts shown in the books of account of the sub-contractors as well as the payment claimed by the assessee to these sub-contractors, the Id. CIT (A) held that the payment to sub-contractors is bogus and accordingly proposed to enhance the, assessment by issuing .8 show cause notice under section 251(2) of the IT Act. The Id. Cr (A) estimated the income of the assessee by adopting NP rate of 11% and consequently the income of the assessee was enhanced by Rs. 19,29,108/-.
4. Before us, the Id. Counsel for the assessee has submitted that during the year under consideration the assessee suffered a paralytic attack and his half body got paralyzed. The assessee was undergoing treatment in Kerala and, therefore, was not able to look after the matter personally during the assessment proceedings as well as in the appellate proceedings. Thus the Id. A/R has submitted that the non-compliance or deficiencies as pointed out by the A.O. and Id. CIT (A) are only due to the reason that it was not possible for the assessee to look after and take appropriate steps in this respect as he was suffering from health problem and undergoing treatment in Kerala. However, the Id. Counsel has submitted that even if the books of account of the assessee are rejected by invoking the provisions of section 145(3), the estimation of income by the AO as well as by the Id. CIT (Appeals) is not based on some reasonable and proper criteria being the past history Of the assessee as well as the prevailing profit in the comparable and identical business activities. The Id. Counsel for the assessee has referred to the comparative details of net profit charged of the assessee for the preceding three years and the current year and submitted that the net profit declared by the assessee for the year under consideration is in line with the past history of the assessee and rather it is higher than the immediate preceding year. He has pointed out that the net profit for the year under consideration before the tax, interest and depredation as declared by the assessee is 5.38% in comparison to 3.12% in the immediate preceding year and this is also in line with the average of the preceding years being assessment years 2006-07, 07-08 and 08-09. Thus the Id. Counsel has submitted that even if the books of accounts of the assessee are rejected under. section 145(3), the same would not ipso facto lead to. any trading addition if the profit declared by the assessee is in line with the past history of the assessee. He has further contended that once the assessment is framed based on the estimation of income under section 144 of the IT Act read with section 145(3), then the enhancement by the Id: CIT (A) based on disallowance of some expenditure is unwarranted as the entire expenditure subsumed in the process of estimation of the income by adopting the net Profit. Therefore, the basis of enhancement itself is not proper and in accordance with the provisions of section 145(3) of the Act. In support of his contention, he has relied upon the decision of Honble Jurisdictional High Court in case of CIT vs. Dr. A.P. Bahal, 322 ITR 71 (Raj.) and submitted that the Montle High Court has held that the mere rejection of books of account would not mean that it must necessarily lead to addition to the returned income. He has then relied upon the decision in case of CIT vs. Gupta K.N. Construction Co., 59 taxmann.com 293 and submitted that after rejection of books of account the AO has to consider eirner the past history of the assessee or history of similarly situated other businessmen/traders. Thus in view of the fact that the assessee’s own past history is available and the net profit declared by the assessce is in line with the average of the past history, then no addition is called for. The Id. Counsel has then relied upon the decision in case of CIT vs. Garment Crafts, 68 taxmann.com 222 (Raj.) as well as the decision in case of cn–ys. Ashok Behi Bharat Sethi & Party, 35 taxmann.com 214 and submitted that the Honble High Court has taken a consistent view that the past history of the assessee is a proper and reasonable basis for estimation of income. He has also relied upon the following decisions :-
CIT vs. Jaimal Ram Kasturi,
33 taxmann.com 315 (Raj.)
CIT vs. Inani Marbles Pvt. Ltd.
175 taxman 56 (Ran
Thus the Id. Counsel For the assessee has submitted that the addition made by the AO as well as enhanced by the Id. CIT (A) is without any basis, the same deserves to be deleted.
5. On the other hand, the Id. D/R has submitted that the AO has pointed out specific deficiency in the books of account and, therefore, by taking guidance of section 44AD the AO has applied 8% NP to estimate the income of the assessee. He has further submitted that the Id. CIT (A) has undertaken the exercise to verify the genuineness of the sub-contract payment by the assessee and during the enquiry, the statements of sub-contractors were recorded wherein it was found that the claim of the assessee was not genuine and the same was treated as bogus. Therefore, there was material with the Id. CiT (A) to enhance the assessment by considering the fact that the claim of subcontract payment is not genuine. He has relied upon the orders of the authorities below.
6. I have considered the rival submissions as well as carefully perused the relevant record including the orders of the AO as well as the Id. CIT (A). The dispute is limited on the point of estimation of income of the assessee after rejection of books of account under section 145(3) of the Act. It is settled position of law that once the AO invoked the provisions of section 145(3) and rejected the books of account of the assessee, then the only course of action to assess the income of the assessee is on the basis of estimation and best judgment as per the provisions of section 144 of the IT Act. The estimation of income on the best judgment should not be on some arbitrary basis but it has to be a decision based on the relevant facts, proper and reasonable criteria to justify the estimation of income. It is also settled position of law as held by the Honble Jurisdictional High Court in a series of decisions relied upon by the Id. Counsel for the assessee that after invoking the provisions of section 145(3), the AO has to consider either the past history of the assessee or the history of similarly situated businessmen/traders. Thus the past history of the assessee which has attained the finality or was not in dispute has to be preferred over the profit of the comparable cases. In case of CIT vs. Ashok Behi Bharat Sethi & Party (supra), the Honble High Court has specifically observed that the AO in making the assessment with reference to the case of another assessee but if it is not a directly comparable case then it is not a safe guide more particularly when the assessee’s past history was available. In the case in hand, the assessee is in the same business and doing the same contract work for various corporate houses rather big and reputed corporate houses. Therefore, the assessee’s contract work is not only audited by the auditors but it is also certified by the other companies including some future companies before making the payment to the assessee. When the facts pertaining to the assessment year under consideration are not different from the preceding years as far as the business activities of the assessee are concerned, then the assessee’s own past history should be the proper basis for estimation of income for the year under consideration. In the case of CIT vs. Inani Marbles Pvt. Ltd. (supra), the Honible High Court while dealing with this issue has held para 3 as under :-
“3. We have heard learned counsel for the parties, and have gone through the impugned judgments. The Assessing Officer rejected the books of account for valid reasons, and invoked provisions of section 145 of the Income-tax Act, and made assessment by applying gross profit rate of 15 per cent on the sales disclosed by the assessee, and accordingly additions were made to the different result. This matter relates to assessment year 2000-01. The Assessing Officer for arriving at this conclusion considered that the assessee had disclosed gross profit rate of 2.30 per cent as compared to 2.51 per cent in 1999-2000, and 16.04 per cent in assessment year 1998-99. Against that order the assessee filed appeal, and the learned Commissioner upheld the invoking of section 145, and examined the aspect of gross profit rate to be applied and considered that gross profit rate declared by the assessee during the year is far less than the G.P.Rate (gross profit rate) shown by the other assessees who are in the same line of business, and applied the G.P. Rate at 14.5 per cent. Against this the assessee filed appeal being Appeal No. 448 of 2004, and the revenue also filed appeal being Appeal No. 464 of 2004. The learned Tribunal negatived the contention of the assessee about challenge to invoking the provisions of section 145. Then, the aspect of gross profit rate to be applied was considered in para 4 and it was found that the Assessing Officer considered certain cases as comparable applied G.P. Rate of 15 per cent which was reduced in appeal to 14.5 per cent but then it was considered that the Assessing Officer does not get unfettered powers to apply any G.P. Rate of his choice, and he is supposed to be guided either by the G.P. Rate declared by the assessee or the profit rates declared by the comparable cases. Then, it was considered that in resorting to the application of Gross Profit rate on the basis of comparable cases, it is necessary that those cases, should be, in fact, comparable with reference to the volume of business, location and other host of factors, and it was found that the objections raised by the assessee were not however dealt with, and therefore, in the absence of any change in the factual position normally the profit rate declared and accepted in the preceding year, constitutes a good basis for working out the Gross Profit. Accordingly since in the earlier year the Gross Profit rate declared and accepted was 2.51 per cent, the same rate should be applied by the learned Tribunal for this year also.”
Therefore, ignoring the past history of the assessee adopting profit rate by the AO without any proper basis is not permitted. Further, once the books of account of the assessee are rejected by invoking the provisions of section 145(3) and the said ..etiori; ;of Ilia AO was upheld by the Id. CIT (A) then doubting some of the expenditures as debted in the Profit & Loss account by the Id.CIT(A) would not affect the assessment which is based on estimation. The Id. CT (A) has though took the pain to examine the genuineness of the claim and in that process the statements of the sub-contractors were recorded. On careful perusal of the statements recorded of the sub-contractors as well as the other relevant material, it is noted that there were some discrepancies regarding the quantum of sub-contract receipts by these sub-contractors from the assessee as recorded in the books of account and stated in their statements as well as the payments to these sub-contractors claimed by the assessee. Therefore, owing to these discrepancies and inconsistencies, the Id. CIT (Appeals) has held that the claim of payment to sub-contractor iS bogus. However; this finding of the Id. CIT (A) is also inconsistent with the fact that the execution of the particular work for which the sub contract payments were made by the assesses is not in dispute and the revenue generated by the assessee from execution of the said work is also not in dispute. Therefore, even if there is a discrepancy in the amounts of the sub-contract payment, it is inevitable that the assessee has to incur the expenditure for execution of a particular contract work. Therefore, even if the claim of sub-contract work is found to be not correct, the income of the assesses; has to be estimated on the basis of turnover and not on the basis of cost in execution of the contract work. Therefore, the entire exercise of the Id. CT (A) in examination of the correctness and genuineness of the sub-contract payment is futile and is irrelevant when the final income of the assessce has been assessed on the basis of estimation as net profit rate on the turnover. Hence enhancement made by the Id. CIT (A) is completely unwarranted and unjustified apart from inconsistent with the provisions of section 144 of the Act as well as the settled regal proposition laying down the guidance for estimation of income after. rejection of books of account. The comparative GP and NP for the preceding years as well as the current year is as under :-
