Five Star Construction Company Vs DCIT (ITAT Raipur)
ITAT Raipur held that A.O after rejecting the books of accounts of the assessee could not have based his assessment on the said books of accounts. Accordingly, once the books of account of an assessee are rejected, then profit has to be estimated.
Facts- Survey proceedings under Sec. 133A of the Act were conducted at the business premises of the assessee firm on 11.03.2016. During the course of the survey proceedings several serious deficiencies had surfaced in the records of the assessee.
It was found by the survey team that the assessee firm for recording on a day-to-day basis its actual business transactions was by way of a consistent practice maintaining manual cash books for the preceding several years.
Notably, AO not being satisfied about the correctness and completeness of the accounts of the assessee on the basis of which its final accounts and audit reports were prepared, thus rejected the same under Section 145(3) of the Act. AO after rejecting the books of accounts of the assessee proceeded with to assess its income in the manner provided in Sec. 144 of the Act and made various additions/ disallowances.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion-Hon’ble Calcutta High Court in the case of Dabros Industrial (P) Ltd. Vs. CIT held that once the books of account of an assessee are rejected, then profit has to be estimated. Further, Hon’ble Allahabad High Court in the case of Shri Venkteshwar Sugar Mills Vs. CIT(Appeals) observed that once the books of accounts are rejected, then there is no option before the Assessing Officer except to estimate the sale and G.P rate which in the case before them was determined by taking comparative figures of the assessee for the previous assessment year.
Held that A.O after rejecting the books of accounts of the assessee could not have based his assessment on the said books of accounts and should have judicially determined the business profits in the manner provided in Sec. 144 of the Act.
FULL TEXT OF THE ORDER OF ITAT RAIPUR
The present appeal filed by the assessee firm is directed against the order passed by the CIT(Appeals)-II, Raipur, dated 07.02.2018, which in turn arises from the order passed by the A.O under Sec. 144 r.w.s. 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) dated 31.12.2016 for assessment year 2014-15. The assessee has assailed the impugned order on the following grounds of appeal before us:
“1. Ld. CIT(A) erred in confirming addition of Rs.90,72,799/- made by the AO on account of PRW (piece rate work) (Labour and Machine) expenses being the difference between the expenses claimed in the profit and loss account (Rs.7,24,00,859/-) and expenses in the records found during survey (Rs.6,33,28,060/-). The addition made by AO and confirmed by CIT(A) is arbitrary, baseless and not justified.
2. CIT(A) erred in confirming disallowance of Rs.2,71,38,940/- made by the AO invoking provisions of sec. 40A(3). The disallowance made by AO and confirmed by CIT(A) is not justified.
3. CIT(A) erred in confirming disallowance of Rs.19,95,450/- made by the AO on account of provision for bonus to staff. The disallowance is not justified.
4. CIT(A) erred in confirming disallowance of Rs.14,28,899/- made by AO on account of amount written off by assessee as bad debt.
5. CIT(A) erred in confirming disallowance of Rs.4,04,56,014/- made by AO out of material purchase account. The disallowance made by AO alleging inflation of purchases and confirmed by CIT(A) is arbitrary and not justified.
6. CIT(A) erred in confirming addition of Rs.4,82,840/- made by the AO invoking sec. 68, on account of cash credit The addition is arbitrary and not justified.
7. CIT(A) erred in confirming addition of Rs. 10,00,000/- made by AO on account of explained credit invoking sec. 68.
8. CIT(A) erred in confirming addition of Rs.27,88,260/- made by the AO on account of alleged unrecorded contract receipts. The addition made by the AO and confirmed by CIT(A) is not justified.
9. CIT(A) erred in confirming addition of Rs.8, 10,000/- made by AO on account of alleged credits found in the records, on account of car sale. The addition is arbitrary and not justified.
10. CIT(A) erred in confirming addition of Rs.1,60,000/- made by the A.O on account of unexplained expenditure u/s.69C.
11. CIT(A) was not justified in confirming addition of Rs. 1,59,000/- made by the AO on account of alleged unrecorded interest receipts.
12. CIT(A) was not justified in confirming the addition of Rs.6,56,248/- made by AO on account of unexplained cash credit invoking sec. 68.
13. Without prejudice to above grounds, the disallowance of Rs.90,72,799/- on account of PRW (Labour & Machine) expense account, addition/disallowance of Rs. 19,95,450/- on account of bonus & of Rs.14,28,899/- on account of bad debts is not justified and is arbitrary inasmuch as the AO rejected the books of assessee and thereafter made specific disallowances/additions based on the entries in rejected books. The stand adopted by AO is illegal.
14. The appellant reserves the right to add, amend or alter any ground/s of appeal.”
2. Succinctly stated, the assessee firm which is a civil contractor had filed its return of income for A.Y. 20 14-15 on 08.11.2014, declaring an income of Rs. 1,78,89,680/-. Case of the assessee firm was thereafter selected for scrutiny assessment under Sec. 143(2) of the Act.
3. Survey proceedings under Sec. 133A of the Act were conducted at the business premises of the assessee firm on 11.03.2016. During the course of the survey proceedings several serious deficiencies had surfaced in the records of the assessee. It was found by the survey team that the assessee firm for recording on day-to-day basis its actual business transactions was by way of a consistent practice maintaining manual cash books for the preceding several years. It was observed by the A.O that the assessee had maintained 4 (four) volumes of manual cash book for the period relevant to the year under consideration, i.e. A.Y. 2014-15. The A.O on a perusal of the photocopies of the impounded records, observed, that the transactions for the year under consideration were spread over 1st page (i.e Page No.42 of impounded Article No.4) and last page (Page No.56 of impounded Article No.8). Referring to the contents of the manual cash books, it was observed by the A.O that the same were being regularly and meticulously maintained, wherein daily cash balances were drawn; entries were verified by responsible partners with their initials at some places; some of the entries were corrected after applying whitener; and postings were made giving ledger folio number against each entry. It was also observed by the A.O that the site-wise details giving names of the sitein-charge, persons through whom payments were made etc. were also recorded in the manual cash book. It was further observed by the A.O, that though the manual cash books made a reference to ledger folio numbers against each entry but no such corresponding ledgers were physically found available during the course of the survey proceedings. Also, it was observed by the A.O that the cash book on the basis of which the final accounts were prepared and got audited were not found available at the business premises of the assessee firm during the course of survey proceedings. On the basis of the aforesaid facts, the A.O holding a conviction that the impounded manual cash books were the actual cash books and the entries therein made were true and correct, thus called upon the assessee to correlate the same with its audited final accounts. In reply, it was the claim of the assessee that the manual cash books found during the course of the survey were rough log books which were maintained by the staff for their own use and memory. It was the claim of the assessee that its business transactions were duly recorded in its regular books of accounts. It was further the claim of the assessee that the manual cash books impounded by the department were not the actual cash books but the log books that were maintained by the office staff for the various firms, viz. M/s Five Star Construction Co. (assessee firm); M/s Five Star Construction Co. Pvt. Ltd; M/s Star Engineering Associates and M/s Star Engineering Associates Pvt. Ltd. It was further stated that the aforesaid log books were maintained by one of their old supervisor who had no knowledge of accounts and was though earlier engaged in field work, but thereafter having come across a medical problem was rendering his services in office. Elaborating on the nature of the entries in the log books, it was stated by the assessee that the same were prepared by the aforementioned person as regards the various transactions of purchase/sale of material, receipts, payments, bank transactions along with individual transactions of the partners of all the aforementioned four concerns. In its attempt to distance its actual business transactions from the contents of the log books, it was, inter alia, the claim of the assessee that the same were notings made by the supervisor who had maintained the same, for the purpose that he may be in a position to give an explanation w.r.t. any query that would be raised any senior officer or partners of the aforementioned firms. It was, thus, the claim of the assessee that the manual cash book that was found in the course of the survey proceedings may not be considered as the actual cash book of the assessee firm.
4. The A.O in order to verify the veracity of the aforesaid claim of the assessee, directed it to produce the ledgers corresponding to the manual cash books that were found in the course of the survey proceedings. In reply, it was submitted by the assessee that no separate ledger was available. However, the A.O did not find favor with the claim of the assessee that the entries mentioned in the manual cash books did not reveal its day-to-day business transactions. The reasons that had weighed in the mind of the A.O for rejecting the aforesaid explanation of the assessee, and concluding that the contents of the manual cash books revealed the actual business affairs of the assessee are culled out as under :-
“The assessee’s explanation is grossly incorrect and misleading. As pointed out above it is a cash book and maintained meticulously on day-to-day basis drawing daily cash balances and posting corresponding ledger folios. It is also contains verification marks and even at some places initials of the controlling partners. The contention that it was maintained by some old supervisor, whose name purposefully concealed as there may be none, who was not having knowledge of accounts is absurd because the cash book was maintained strictly as per requirements of accountancy, in cool and compose manner with all sincerity and diligence. Several entries are interlacing and interlocking with the tally backup of final accounts prepared for the purposes of tax authorities. Some features and reasons for maintaining this cash book are noted below :-
a) This cash book mainly contains all types of labour expenses incurred on actual basis.
b) It contains machinery expenses of own machines and hired machines incurred on actual basis.
c) It contains record of receipt
(i) Cash received from different partners, or their relatives for meeting day to day expenses,
(ii) Cash withdrawn from banks,
(iii) Cash received from parties to whom cheques are issued of inflated amounts against material purchase or subcontract payment for machines or labour and amounts representing inflated part are received back in cash,
(iv) Cash received on sale of scarp, material, other items which are not recorded in audited books of accounts,
(v) Cash received from parties over and above the amount received through cheque in respect of works executed.
(vi) Cash recollected by payment of bogus unsecured loans made through cheque in audited books of account.
Therefore, the assessee’s contention that it is log book maintained by some ex-employee having no knowledge of accountancy in clearly false and unbelievable. Therefore, I am not satisfied about the correctness or completeness of the accounts of the assessee, hence the books on the basis of which final accounts and audit report are prepared are rejected u/s 145(3) of the Act and the income is assessed in the manner provided in sec. 144 of the Act after taking into account all relevant material. However, the entries made through bank, which were found to be correct are not disturbed and adopted as recorded in the Audit Report. For the purpose of clear understanding the entries contained in manual cash book have been entered into Tally software and details thereof are discussed subsequently.”
5. The A.O not being satisfied about the correctness and completeness of the accounts of the assessee on the basis of which its final accounts and audit report were prepared, thus rejected the same under Section 145(3) of the Act. The A.O after rejecting the books of accounts of the assessee proceeded with to assess its income in the manner provided in Sec. 144 of the Act and made the following additions/disallowances:-
