ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the assessee against the order of the CIT(A), dt. 5th Feb., 2002 for the asst. yr. 1998-99, in the matter of order passed under Section 143(3) of the IT Act, 1961.
2. First grievance of the assessee revolves around estimation of net profit rate of 8 per cent on gross contract receipts. In his order under Section 143(3), the AO observed that on 8th March, 2001, the Authorised Representative attended and produced books of account which were partly examined. The assessee is engaged in business of civil construction. During the year under assessment, gross contract receipts have been declared at Rs. 3,65,28,643 as against Rs. 1,82,15,556 in the immediately preceding assessment year. The net profit ratio against gross receipts declared by the assessee comes to 1.22 per cent as against 0.99 per cent and 1.52 per cent in the asst. yrs. 1997-98 and 1996-97, respectively.
3. He further observed that further examination of various details of expenses revealed that following expenses on account of wages have been incurred in the month of March, 1998:
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S. No. Amount Date of payment Month to which it
Pertains
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1. Rs. 6,30,185 30.3.1998 January, 1998
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2. Rs. 3,96,025 31.3.1998 March, 1998
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3. Rs. 4,96,215 10.3.1998 February, 1998
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From above facts he found that wages for the month of January, 1998 have allegedly been paid on 30th March, 1998 for the month of February, 1999 on 10th March, 1998 and for month of March, 1998 on 31st March, 1998 itself. The AO stated that it is not understood why wages for the month of January, 1998 were kept pending and those of February, 1998 were paid earlier. Moreover, wages for the month of March, 1998 have been paid on 31st March, 1998 itself.
On examination of wages scroll, the AO further noticed as under:
1. The addresses of persons to whom wages were claimed to have been paid were not mentioned.
2. Actual date of payment is not mentioned by the payees receiving the wages.
3. Amount of work done is not verifiable against which payment is made.
4. There is no record on the scrolls as to by whom payment is made and against what work done.
4. After having made above observations, the book results declared by the assessee were rejected and net income was estimated at @ 8 per cent of declared gross receipts.
5. While rejecting the book results, as also the method of accounting followed by the assessee, reliance was placed by the AO on the following judgments of Hon’ble Courts:
(a) Mrs. D.M. Alexander v. CIT ;
In this case, it was held that if no proper method of accounting has been employed, the tax authority is free to determine the basis and manner of computation of income.
(b) S.N. Namasivayam Chettiar v. CIT ;
In this case, the Hon’ble Supreme Court has held that even regularly employed method can be rejected if it does not show true profits.
(c) Food Specialities Ltd. v. Asstt. CIT (1995) 52 ITJ (Del) 554 : (1995) 54 ITD 352 (Del) i.e. the jurisdictional Bench:
In this case, it was held that when true income cannot be deduced, method of accounting can be rejected notwithstanding the fact that such a system was accepted in past.
6. By the impugned order, CIT(A) observed that the assessee has raised a general ground to the effect that assessment order of the Dy. CIT is bad in law and that no specific ground regarding estimation of profit @ 8 per cent was originally raised in the grounds of appeal filed along with Form No. 35 even though the same was raised during course of appellate proceeding itself. After having the following observations, the rejection of books of account and estimation of profit at 8 per cent was confirmed by the CIT(A):
I have considered these arguments. The appellant is a civil contractor. Maximum percentage of expenses is on account of labour and wages. Without the payment to labour of their wages in time, no labour will work. The AO has brought out in the order a peculiar position. The appellant has shown payment of wages for January, 1998 in the month of March, 1998 on the 30th of March i.e. after a gap of two months. The appellant does not give the names and addresses of the workers. There is no co-relation of the work done by the labour and the payment of wages. The appellant has given a very vague reply : ‘It is humanly not possible to provide the details as to what work a particular labourer has done at the site. Duties are shifted from place to place, work to work, their wages are paid on the basis of day-to-day basis’. This reply itself shows that the payment of wages for January, 1998 shown to be made on 30th March, 1998, cannot be accepted to be the correct position depicted in the accounts maintained. This does not appeal to commonsense where the wages are on the basis of day-to-day work, no labour class will work if not paid on time. The appellant has also not given any explanation as to why the wages for January were paid in end-March.
7. The CIT(A) also found that in the course of assessment, the AO has disallowed payment of salary of Rs. 1,44,000 to Shri Sanjay Dogra and Smt. Kanchan Dogra on the plea that assessee was not able to show the work performed by these persons. However, the CIT(A) held that since the AO has estimated net profit at 8 per cent, therefore, the expenses on salary of Rs. 1,44,000 would also be covered by the net profit of 8 per cent. The CIT(A) also found that an addition of Rs. 1,42,990 was made by the AO on account of discrepancies between the figures of gross receipts as shown in the TDS certificate and those declared in the P&L a/c. The CIT(A) observed that assessee filed a reconciliation statement wherein the higher amount of payment was stated to be on account of advance for purchase of material on which no TDS was deducted. The CIT(A), however, directed the AO to reconcile the figure of secured advance received by the assessee and to see that this advance has been declared as a receipt as and when adjusted in the bills raised.
8. The CIT(A) also found that while computing total income, the AO has not taken miscellaneous income of Rs. 2,29,800 which has no relation with the gross contract receipts on which profit has been estimated at 8 per cent. After giving credit for Rs. 15,000 being expenditure on lawyer’s fee paid by the assessee, the CIT(A) enhanced the income of the assessee by Rs. 2,14,800.
9. Being aggrieved by the order of the CIT(A), the assessee is in appeal before us.
10. It was vehemently argued by the learned Authorised Representative, Shri R.S. Singhvi, that audited balance sheet along with all the details were filed with the return of income. The books of account were also produced, before the AO for verification and the AO has verified the same on 8th March, 2001 as observed by him in the assessment order. All the details called by the AO were filed along with the supporting evidence. The profit rates declared by the assessee in all the preceding years which were accepted by the Department in the course of assessment under Section 143(1)/143(3) of the Act were also filed before the AO. The nature of business carried on by the assessee remained the same as in earlier years and the profit rate arrived at during the year was in consonance with the rate of profit declared in the earlier years which were accepted by the Department under Section 143(1)/143(3). However, the AO without pointing out any defect in the books of account or the system of accounting being regularly followed by the assessee, rejected the book results and estimated profit at 8 per cent of gross contract receipts, even by disregarding the fact that cost of material supplied by the department to the assessee for execution of contract was not earning any profit. He further submitted that only adverse observation of the AO relates to payment of wages for the month of January, in the month of March. For this, he submitted that sufficient justification was furnished before the AO to the effect that in the month of January, the assessee did not receive the payment in respect of the work executed, and which was actually received by it in month of March, therefore, as soon as the payment was received from the Government, the assessee paid the wages immediately. As per learned Authorised Representative, no fault can be found on the part of assessee for delay of one month in the payment of labour charges which was attributable to reasonable cause being financial crises and the same cannot be made the basis for rejection of books of account. With regard to AO’s allegations regarding the addresses of the labourers to whom wages have been paid were not mentioned, he submitted that labourers keep on shifting from one place of site to other and they are not having any permanent house or address at the place of site where work is executed, which is generally at remote places. He further submitted that labourers were not paid as per the work performed but they were paid on daily basis by computing the number of days put in the month with respect to daily wages payable to them. It was, therefore, stated that humanly it was not possible to provide the details as to what work a particular labour has done at the site. Duties are shifted from place to place, work to work, their wages are paid on the basis of days put in the month. He drew our attention to the profit rates declared by the assessee in the preceding years which were accepted by the Department under Section 143(1)/143(3) of the Act, after having a marginal/nominal addition. As per learned Authorised Representative, the books of account produced before the AO were regularly maintained and audited as per the provisions of Section 44AB of the IT Act, 1961. In the work performance, the Government department used to supply the cement and steel and the assessee provided only labour and balance material. He further submitted that books of account and vouchers were produced before the AO and the same were verified by him. While applying the NP rate, the AO has even not excluded the value of the material supplied by Government department on which there is no question of any profit being earned by the assessee.
11. On the other hand, learned Departmental Representative submitted that major component of expenditure was incurred on the labour charges and it is unthinkable that a labour is not paid on day-to-day basis. The labourers are generally paid daily wages and the outstanding labour payment for month of January, which was paid in month of March itself was sufficient to reject the book results. In respect of other income added by the CIT(A) while enhancing the assessment, the learned Departmental Representative submitted that this income was nothing to do with the regular contract receipts, therefore, CIT(A) was perfectly justified in enhancing the assessment with respect to the miscellaneous income which was in the nature of arbitration award received during the year in respect of work executed in earlier years.
12. We have considered the rival contentions carefully, gone through the materials placed on record and the orders of the authorities below. We have also deliberated on the case law cited by the AO and CIT(A) in their respective orders, as well as referred to by the learned Authorised Representative and Departmental Representative with respect to rejection of book results and estimation of profit on contract receipts. From the record, we found that assessee was engaged in business of construction since 1984, mainly undertaking work of Central Public Works Department (CPWD) and Department of Telecommunication (DOT) as class one contractor. During the year under consideration, the assessee firm had undertaken various civil projects. The proprietor of firm is a qualified civil engineer and looked after business with the help of a son who was also qualified engineer. Undisputedly, the turnover of the assessee exceeded beyond the limit prescribed for the audit under Section 44AB of the IT Act, 1961. The books of account regularly maintained were got audited and there was no adverse comment of the auditor with regard to the system of accounting being followed by the assessee or with regard to the true and fair picture of the profit disclosed by the assessee and the state of affairs being shown by the assessee as at the end of the year. Since asst. yr. 1994-95 till 1998-99, the turnover was varying between Rs. 72 lacs to Rs. 3.65 crores and the profit declared thereon was also varying from 0.99 per cent to 1.65 per cent. During the year under consideration, the contract receipts have increased to Rs. 3.65 crores as compared to contract receipts of Rs. 1.82 crores in the immediately preceding asst. yr. 1997-98. In the asst. yr. 1995-96, on the contract receipts of Rs. 1.23 crores, the profit rate of 1.61 per cent was accepted by the Department under scrutiny assessment. During the year under consideration, the contract receipt has increased to more than three times, marginal decline in the rate of profit is inevitable as overall increased profit can be achieved with some sacrifices in profit rate. As per the nature of work contract undertaken by the assessee, materials like cement and steel were supplied by CPWD/DOT and assessee was providing labour and balance material. Payment was disbursed to the assessee by Government department on the basis of work completed and bills raised and certified by the CPWD/DOT engineers. On the basis of work completed as per the certificate of engineer of CPWD/DOT, after deducting amount of material supplied by the department itself, tax was deducted thereon and balance payment was being made to the assessee on the settlement of account. In respect of some of materials which were not being supplied by the department, the assessee was given secured advance for purchase of such material and the same was adjusted while making the final payment of bills, wherein such materials are used. Thus, the difference found out by the AO with respect to contract amount on which TDS was deducted and the contract amount disclosed in the audited books of account were basically attributable to such secured advance being made by the department. As such advances were not actual payments for the work done, but were merely advances to be adjusted against the final bills, no TDS was deducted on such advances. These advances, when settled and adjusted against the final bills, the same were subjected to TDS. Therefore, the AO found difference and without reconciling the same with respect to the secured advance adjusted at the time of the final payment, he worked out difference at Rs. 1,42,990. However, the CIT(A) called reconciliation statement and confirmation was furnished by the Government department with regard to release of such secured advance whereon no TDS was deducted. Therefore, the CIT(A) accepted the assessee’s contention and deleted the addition made by the AO on account of such difference. During the course of scrutiny assessment under Section 143(3), the assessee produced books of account and which were also examined by the AO. The point which disturbed the AO relates to the labour payment for months of January, February and March, 1998. The AO found that labour payment for the month of January was actually paid in March, 1998 and labour payment of February was paid in the next month of March. Labour payment for March, 1998 was paid by the end of March, 1998 itself. The AO however, did not accept the assessee’s version that delay in payment of labour wages was on account of financial difficulty. From the record, we found that assessee got the payment in respect of work executed in the month of March, therefore, immediately on receipt of payment he paid the labour charges for January, 1998. Otherwise also, the labour payment for any month was also paid in the immediately next month, no fault can be found for payment to labourers of February, 1998, in the month of March, 1998. Similarly, labour payment for March was paid by the end of March itself, cannot be made the ground for rejection of books of account. As per our considered view, the books of account regularly maintained in the course of business which are duly audited under the provisions of IT Act, 1961 and are free from any qualification by the auditors should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. For rejecting the books of account, it is Revenue’s onus to prove that either the books of account maintained by the assessee are not correct and complete or the method of accounting adopted is such that true profits cannot be deduced therefrom. As the onus to make out a case for rejection of books of account is on the Revenue, the AO is required to indicate specific defects in the books of account which clinches the profit shown by the assessee or its state of affairs. In the instant case, while rejecting the books of account, the adverse observation of the AO was with respect to delay in payment of labour charges for the month of January, 1998. As per our considered view, this is not a sufficient for rejecting the audited accounts wherein no adverse comment was made by the auditor, nor any specific defect was pointed out by the AO. It was not the case of AO that assessee has recorded excess payment of labour charges, nor there is any allegation that labour charges were disproportionate to the nature of contract work executed. On the other hand, we found that even as per Government manuals, the percentage of labour expenses as a percentage of total value of contract, in respect of civil contract, is 25 per cent, whereas in the instant case, the expenses claimed under labour charges work out to 20.67 per cent (total contract receipts Rs. 364.54 lakhs, labour charges Rs. 75.37 lakhs). Thus, it is not a case of excess payment of labour charges to reduce the profit, but, on the contrary, as against the standard norms of 25 per cent labour charges amounting to Rs. 91.13 lakhs, the assessee has actually incurred only Rs. 75.37 lakhs, which works out to be 20.67 per cent. We had also carefully gone through the details of monthly expenses incurred on labour, materials and other expenses, copy of labour charges account, copy of staff salary rolls from October, 1997 to March, 1998, copy of cash book from February, 1998 to March, 1998, as placed in the paper book page Nos. 23, 29 to 54, and do not find any mistake therein. After production of books of account and submission of explanation by the assessee, if any, asked for, with respect to the contents of the return and books of account, the Revenue may accept the same or after pointing out the specific defect may reject the books of account and proceed to determine the assessee’s income as per the provisions of Section 145. Income-tax provisions nowhere either authorize the AO or cast an obligation on the assessee to prove the negative result, i.e., to prove as to why he failed to make a profit at a particular rate. Before rejecting the books of account, the Department has to prove that accounts are unreliable, incorrect or incomplete.
13. The accounts regularly maintained in the course of business, duly audited under the provisions of IT Act and free from any qualification by the auditors, should be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. Even though it is not possible to lay down the exact circumstances in which accounts should be rejected as unreliable or incorrect, yet the accounts may be rejected as unreliable if important entries and transactions are omitted therefrom or if proper particulars and vouchers, bills, etc. are not forthcoming or if they did not include entries relating to particular class of business transaction. The assessee should invariably be given opportunity for offering explanation regarding defects in accounts and on his failure to satisfactorily explain the defects, the Department would be justified in rejecting the books of account. Thus, books of account should not be rejected light-heartedly. Reasons for rejecting wages record as commented by the AO relate to full address of the labour, which was not given on the muster roll register. We found that wages record has been kept by the assessee as per regulation known as “Contract Labour (Regulation and Abolition) Act, 1970. We have verified the copies of wages register placed in the paper book and found that same are as per provisions of the respective Act. The addresses of the labourers to whom wages have been paid were not mentioned since the labourer stays in the Jhugi Jhoperies at a work site itself, and to this effect the assessee has already replied to the AO vide its letter dt. 23rd March, 2001, through which, site of construction where labour resided was given as Telecom Civil II Division, Viket Vihar, New Delhi, which was however not taken notice by the AO and the same was sent to him by courier and was found to be duly received by the Department. The AO had also alleged that the actual date of payment was not mentioned by the payee receiving the wages. In this respect we found that the date on which the entry has been made in the wages register was actual date of payment. As per the nature of the contract work executed by the assessee, the assessee gets a contract to carry out a particular job or a contract for which the material was supplied by the CPWD/DOT and the labour was provided by the assessee contractor. The assessee used to make payments to the labourers on the basis of mandays put by in by the labourers and not on the basis of work performed by them on each day. We, therefore, do not find any merit in the allegations of the AO that work performed by the labour was not mentioned on the payment vouchers and to make them basis for rejection of books of account. We also found that payment to the assessee contractor was also made on the basis of work completed and measured by the department itself and not on the basis of what the labourer has done. The bills for such a contract was prepared, which were got verified by the engineers of contractee before making payments. On the basis of bills which are finally approved by the Government engineers/contractee, the payment was given to the assessee contractor after deducting TDS. Thus, it was humanly not possible to provide the details as to what work a particular labourer has done at the site. AO’s allegations to the effect that there was no record on the scrolls as to whom payment is made and against what work done, is not sustainable, since wages scrolls were prepared not on the basis of the work which the labourer carries on, but his/her name, the details such as the number of days the person has worked, the rate of wages, the total amount is given and the receipt is taken from the labourer concerned. It is not possible to mention the work which a particular labourer has carried out during the day. We also found that in earlier years, the book results of the assessee were accepted after verification of books of account subject to minimal changes. The case law referred to by the AO while rejecting books of account are not at all applicable to the facts and circumstances of the instant case, insofar as there was no reason much less a cogent reason for rejection of books of account. These case law are applicable only when books of account are liable to be rejected and not otherwise. The AO has also not indicated any defect in the system of accounting regularly followed by the assessee, or its correctness, nor there was any change in the method of accounting during the year under consideration as compared to the earlier years to indicate any intention of assessee to show low profit.
14. While examining the books of the assessee, ITO has to consider the following aspects:
(i) Whether the assessee has regularly employed a method of accounting ?
(ii) Even if regular adoption of a method of accounting is there, whether the annual profits can properly be deduced from the method employed ?
(iii) Whether the accounts are correctly maintained ?
(iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein ?
If the answers to above four questions are in the affirmative, assessee’s profits are to be computed on the basis of his accounts. In such cases, proviso to Section 145(1) or Section 145(2) cannot be invoked. On the perusal of the materials placed on record, in the instant case, we found that answers to all the above four questions were affirmative.
The Patna High Court has delivered a very important ruling in Md. Umer v. CIT . In that case, the assessee was individual, who derived income from sale of country liquor. The Tribunal gave five reasons for the purpose of rejection of book profits as follows:
(1) The sales were not verifiable.
(2) From the point of drawing of the liquor from the barrels, no account was maintained and even the normal leakage in the process of drawing and filling in the bottles was not shown.
(3) Year to year, the book results shown have been rejected and profit invariably estimated by the Department.
(4) The percentage of profit shown was low.
(5) Drawings for expenses were inadequate.
However, assessee had produced all his books of account before the ITO and only two defects were found by him : (1) absence of cash memos which means sales are not verifiable, and (2) certain transactions were noted in lump sums.
15. But, no finding has been recorded by either of the authorities below as to the unacceptability of the method and irregularity of the accounts kept by the assessee. It is well-settled that in the absence of such a finding recorded by the authorities, the book results cannot be ignored or brushed aside.
Very important principle of law was laid down by the Patna High Court in the following words:
There is no finding in the present case that any of the entries in the books of account was not correct; there is no finding that the assessee is not employing a method of accounting; and there is no finding that such a method of accounting has been irregularly employed by the assessee. In the absence of any such finding, there being no reason germane to the unacceptability of the book results, it must be held that the Tribunal as well as the Revenue authorities below had no materials before them on the basis of which it could be said that the trading results were not verifiable and that, therefore, they should not be accepted, nor is it their case that the trading results could not be deducible from the entries of the books of account regularly employed.
The Patna High Court, therefore, held that–“the finding of the Tribunal upholding the rejection of the book profit shown by the assessee was vitiated by reason of its reliance upon suspicion, surmises as also irrelevant material. The finding that sales were unverifiable is not based on the materials on record and is an arbitrary finding.
16. In the instant case, the assessee has been regularly maintaining the percentage of profit between 1 per cent to 2 per cent. Such profit is actually worked out at higher figure, if we take only labour charges as a contract receipt, insofar as the material was supplied by the Government, on which there is no question of any profit being earned by the assessee. From the record, we also found that out of total contract receipts of Rs. 3.64 crores, the material used and which was supplied by the Government amounted to Rs. 1,60,35,409 as per the certificate of chartered accountant placed on the record and placed at p. 80 of the paper book. There is no question of any profit being earned by the assessee on the amount of Rs. 1.60 crores of materials being supplied by the Government/” contractee”, to the assessee firm for being used in the contract assigned to assessee by these Government departments. It is also not the case of the AO that any part of the contract receipts had not been entered in the books of account or that assessee had accounted for expenses more than what have been actually incurred.
17. In view of the above facts and circumstances of the case and the materials placed on the record, we do not see any valid reason and justification for rejection of audited books of account and the method of accounting regularly and consistently followed for accounting the contract receipts. Thus, there is no justification for estimating the profit at 8 per cent by disregarding the book results.
18. With regard to payment of salary being declined by the AO, which was accepted by the CIT(A) on the plea that since profit has been estimated at 8 per cent, no separate disallowance was to be made, from the record, we found that Shri Sanjay Dogra to whom salary of Rs. 72,000 was paid, was graduate and has worked with the assessee as site in-charge mainly looking after day-today affairs and other routine work and reporting to the proprietor. In respect of Smt. Kanchan Dogra to whom also salary of Rs. 72,000 was paid, was matriculate and was working as telephone operator-cum-office assistant in the assessee’s firm. The AO was of the view that the services rendered by these two persons could not be explained before him. In the interest of justice, we are restoring the ground with regard to disallowance of salary of Rs. 1.44 lacs to the file of the AO for deciding the issue afresh after giving due opportunity to the assessee in this regard.
19. With regard to other receipts which were alleged to be in the nature of arbitration award received during the year, we are inclined to agree with the learned senior Departmental Representative, Mr. B.P. Mishra, that such income was in addition to the regular profit being earned by the assessee in respect of the contracts executed during the year and the same is liable to be separately added since the works related to such awards were executed in the earlier years. In the interest of justice, we are restoring this ground also to the file of AO to verify the exact nature of such receipts and to find out whether these are in the nature of trading receipts or otherwise. After giving deduction on account of expenditure incurred for getting such income, the AO may decide afresh the taxability of such income, in addition to the normal profit being disclosed by the assessee.
20. In the result, the appeal of the assessee is allowed in part in terms indicated hereinabove.