ORDER
G. Krishnamurthy, President
1. The assessee in this appeal filed by the Revenue is a building contractor. For the year under appeal, it filed a return disclosing an income of Rs. 62,100. In the course of examination of accounts, the ITO found that the assessee had shown gross receipts at Rs. 14,63,470 and the gross profit thereon at Rs. 2,04,685 and the net profit of Rs. 62,079 which worked out to 14% and 4.5% respectively. The ITO also found that in the final accounts filed before the Department namely the balance sheet and the profit and loss account, the work in progress was shown at Rs. 4,50,000 but that has no basis and that was on estimate basis. The ITO also noticed that the assessee did not maintain any stock register and in the absence of stock register, it was not possible to correctly estimate the work in progress. As regards receipts, he found that the actual payments received by way of cheques was of Rs. 14,63,470 and the amounts deducted by the Government towards material supplied was of the order of Rs. 6,26,320, thus totalling to Rs. 20,89,790. The ITO took the opinion that even though there is a Supreme Court decision in the case of Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, that in the case of Contractors, no profit should be estimated on the value of the material supplied by the Government, the assessee had not produced any proof to show that the facts of the case fell within the ratio of the Supreme Court decision referred to above and, therefore, the profit on material also could be estimated. The ITO noticed that the assessee had taken secured advance on the material and normally the advance was given at 75% of the material lying at site. Working on these basis, the value of the closing stock of the material lying at site should have been Rs. 3,82,900 as against which the assessee had shown only Rs. Mac. Thus there was a difference of Rs. 2,82,900 which was not explained. He also obtained a certificate from the department which showed that the assessee was paid Rs. 17,96,000. He, therefore, regarded that the receipt should be taken at Rs. 17,96,000 although the assessee had shown only Rs. 14,63,470. For the reason that the work in progress was not properly arrived at and the closing stock was not properly accounted for, he rejected the book results and taking the receipts at Rs. 17,96,000, he determined the income on estimate basis at Rs. 1,50,000 net, before allowing depreciation. This was against the income of Rs. 62,100 shown by the assessee in the return. Aggrieved by this estimate, the assessee appealed to the Commissioner of Income-tax (Appeals).
2. Before the CIT(Appeals), the assessee filed a statement showing how the receipts could only be Rs. 14,63,470 and not Rs. 17,96,000. Other discrepancies also were stated to have been satisfactorily explained before the CIT(Appeals). It was also pointed out through a comparative chart filed that in all the previous years, the book results were accepted, except for minor variations in one year namely 1977-78. Even that also was deleted in appeal. Keeping in view the reconciliation statement between the receipts shown by the assessee and the receipts shown by the Department and the accepted past history, the CIT(Appeals) felt that there was no need to reject the book results and estimated the income at Rs. 1,50,000. The ITO was, therefore, directed to accept the income as shown. It was against this order of the CIT(Appeals) that the present appeal is filed by the Revenue.
3. The learned Departmental Representative Shri Tandon submitted that for the reasons given by the ITO, the book results were rightly rejected as the method of accounting employed by the assessee could not be said to be such as to be capable of deducing true and correct profits. When the difference between the actual closing stock that ought to have been shown and was shown, was so high as Rs. 2,82,000, the ITO proposed only an addition of about less than Rs. 1 lac to make the income at Rs. 1,50,000 and that must be held to be very reasonable and, therefore, the CIT(Appeals) was not justified in deleting the addition proposed by the ITO. In a case of this nature, where accounts were not properly maintained, where work in progress was not ascertained and where closing stock was not properly shown and where the expenses were not properly vouched, it could not be said that the method of accounting employed was such as to take the case out of the purview of Section 145. Once it is held that Section 145 applied and what comes next is reasonableness of the income estimated and for the reasons mentioned above, the income estimated could not be said to be excessive. He also pointed out that in the case of the contractors, the previous results could not be a guide because the income of each year would be dependent upon so many factors. The CIT(Appeals) fell into an error, therefore, in relying upon the past record to delete the addition.
4. For the assessee the learned counsel Shri S.P. Verma relying upon the order of the CIT submitted that once reconciliation of the receipts was made and once the basis for the estimate of work in progress was explained and when the contract was the same as in earlier years, it would be very wrong to say that the previous record was not a proper guide to determine the reasonableness of the income estimated. The estimate made by the Department would give a net profit rate of about 10.5%. That was never the rate shown by the assessee in any of the previous years starting from assessment year 1971-72. Therefore, it cannot be said that the estimate made by the Officer was right and showed the normally correct income. The CIT was justified in deleting the addition made relying upon thepastrecord.moreso when the defects pointed out in the accounts were all explained and no other defects were pointed out.
5. In our opinion, it cannot be said that in a case of this nature, the provisions of Section 145 are inapplicable. It is no doubt true that in the case of a contractor, work in progress has to be brought into accounts in order to show the profit earned in respect of the work turned out and the profit embedded in the receipts received during the year. The concept of bringing to accounts the work in progress is no different from the concept of bringing into accounts the closing stock in the case of a trader or a manufacturer. But unlike in the case of a trader or a manufacturer, in the case of a contractor the work in progress cannot be exactly arrived at with reference to any particular books because there are so many components which go to make up the work in progress and which have to be estimated. For example, the work turned out in respect of which bills were not received, the value of the material lying on site, which cannot be exactly valued and ascertained except at a great cost and the value of the work executed in respect of which bills had to be made out. These things have to be estimated. Therefore, estimate in arriving at the work in progress is necessary and inevitable and in every estimate, there is bound to be certain amount of approximation and guess work. Merely on the ground that the work in progress was estimated, it cannot be said that the book results were not to be accepted and that proviso to Section 145 is applicable unless it is shown that the work in progress was arrived in such a way as to be too far from the reality. In this case, the ITO attempted to prove the unreliability of the amount of work in progress arrived at by pointing out that the closing stock ought to have been Rs. 3,82,900 as against Rs. 1 lakh shown by the assessee. The basis for this is the assumption that normally the advance is given at 75% of the material lying at site. There was no basis for this assumption nor any figures were given to show that this hypothesis could be accepted as correct. It is the mere ipsi dixit of the ITO without any basis to support it. The advance can be given at 75%. It can be more, it can be less. This is, therefore, a surmise and conjecture. Now the figure of Rs. 3,82,000 arrived at as the probable closing stock was based upon this surmise. Since there was no basis for this surmise and conjecture, we cannot go by the figure of Rs. 3,82,000 arrived at by him. Since the figure of closing stock arrived at by the ITO was not properly supported, it cannot be said that the conclusion reached by the ITO on that basis was proper. This is so far as the correctness of the estimate made by the ITO.
6, Now so far as the receipts are concerned, the ITO is not correct in saying that the law laid down by the Supreme Court in the case of Brij BhushanLal Parduman Kumar (supra) is not applicable to the value of the material supplied by the Department. Applying the principle of law laid down by the Supreme Court, the value of the material supplied by the Government must be excluded. Doing so the balance of receipts should come to only Rs. 14.63 lakhs shown by the assessee. The estimate of income at Rs. 1,50,000 on these receipts of Rs. 14.63 lakhs would work out to about 10.4%. In none of the previous years, the assessee had shown such a high rate of profit nor had the department estimated the profit at such a rate nor the books of account were ever rejected. We are unable to accept the proposition canvassed by the Departmental Representative that the previous records are not to be taken as a guide for determining the profit. The previous results are the best guide in any case. The previous results are only the points of reference, in relation to which the results of subsequent years are to be judged and reasons for variations are investigated. The range of profit charged will be discernible from the previous records. The lowest rate of net profit rate shown and accepted by the Department was 2.8%. In the immediately preceding assessment year rate of net profit shown and accepted was 2.75% and the gross profit was 11.75% on total receipts of Rs. 2,63,000 as against which the results shown this year were 4.5% net prof it and 14.5% gross profit on the receipts of Rs. 14,63,470 as against 4.5% shown by the assessee and 2.75% accepted in the immediately preceding assessment year 1981-82 and the same rate of profit shown and accepted in the still earlier assessment year 1980-81, the estimate made by the ITO of the profit at 10.5% was very excessive and unreasonable. The ITO has not shown any basis for determining the income at Rs. 1,50,000. It is now the settled law that whenever estimates of income are resorted to in order that they are not arbitrary, unreasonable and unjustified, the ITO must show the basis on which and the method by which and the manner in which the estimate was made. These are the safeguards provided to act as an insurance against arbitrary estimates. None of these guidelines settled by the law of the land was disclosed by the ITO except leaving us to infer that because of the variations in the closing stock, he determined to fix the income at Rs. 1,50,000. If that were so, as we have already pointed out earlier, the difference in the closing stock was more conjectural than real. We cannot, therefore, go by that standard if at all that was acting on the mind of the ITO as submitted before us by the learned D.R. for fixing the income at Rs. 1,50,000. Therefore, the estimate made by the ITO cannot be sustained or supported. Now the learned CIT felt that in view of the past accepted history and reasonableness of the rate of gross profit shown this year, even though the method of accounting employed by the assessee could not be said to be satisfactory, the book results could be accepted. We are inclined to agree with this view. We, therefore, confirm the view taken by the learned CIT and dismiss this appeal. It is to be noted that no other defect was pointed out by the ITO in his assessment order other than those discussed above.