Assessee’s failure to verify genuineness of labour charges led to rejection of its books of account

Dr. Amarveer Singh for the Appellant. Sudhir Sehgal for the Respondent.

ORDER

Bhavnesh Saini, Judicial Member – The Departmental appeal as well as the cross-objection by the assessee are directed against the order of the learned Commissioner of Income-tax (Appeals), Patiala, dated January 31, 2014 for the assessment year 2010-11.

2. We have heard the learned representatives of both parties and perused the material available on record.

3. Briefly the facts of the case as emerging from the impugned orders is that the assessee is a contractor. During the assessment proceedings, the books of account of the assessee were rejected under section 145(3) of the Income-tax Act, 1961, and net profit is assessed at 12 per cent. of the gross receipts and income was accordingly computed. The facts are discussed by the Assessing Officer in the assessment order. In brief, the reason for rejection of books of account is that the assessee failed to verify the genuineness of opening and closing balance of labour payable. It appears from the assessment order that the Assessing Officer has asked the assessee to submit the detail in a particular fashion. However, the assessee only filed copy of labourers identification register. Secondly, the assessee failed to justify the quantitative and qualitative details of the closing stock. Thirdly, the assessee failed to justify the loan to one Smt. Amandeep Kaur. The Assessing Officer has also submitted that the assessee was requested to file the detail of work done along with material, labour used, verification/justification of purchase, work done and expenses of labour, bonuses, etc. However, the assessee has taken the plea that the works were related to Defence Department and after completion of work, the copy of work agreement and other details are kept by the Defence Department. The assessee, therefore, failed to submit the documentary evidences asked for by the Assessing Officer The Assessing Officer has also mentioned that with regard to query regarding audit report in which the method of accounting is shown as mercantile and cash system maintained in the income-tax reports filed with the Department the assessee submitted that from the very beginning, the assessee has taken payments of contract on receipt basis. The assessee has neither reduced the work-in-progress for the financial year 2008-09 nor added work-in-progress for the financial year 2009-10.

4. During the appellate proceedings the assessee submitted that the rejection of books of account is incorrect. It is submitted that even under section 44AB where the books of account are not maintained and gross receipts are less than Rs. 1 crore, the profit is to be calculated at 8 per cent. It is further submitted that in the case of Sh. Sukhwinder versus the assessee, the hon’ble Income-tax Appellate Tribunal, Chandigarh vide order dated September 24, 2013 accepted the books of account and net profit at 1.2 per cent of the gross receipts declared by the assessee. As regards, the labour expenses, the assessee submitted that most of them are technical labour kept on permanent basis. No labour person can enter into the premises of Air-Force without their entry in the Air-Force record at main guard room. He has regularly filed value added taxes returns with complete details. He submitted bills and vouchers for various expenses. Smt. Amandeep Singh was produced during the assessment proceedings. The assessee submitted that “in response the assessee produced complete books of account along with sale and purchase vouchers, bank statements, labour register and submitted details which were required by the Income-tax Officer, Barnala. The learned Income-tax Officer, Barnala asked the assessee to submit the list of persons to whom labour is payable of Rs. 23,00,000 accordingly the assessee submitted a copy of account from the books of account for the financial year 2010-11 detail of labour paid Rs. 23,00,000. The assessee explained during the course of assessment proceedings that they used technical labour, mostly the labour is permanent on all the stations. No labour person can enter into defence land, the premises of air force without their entry in the air force record at main guard room. The assessee maintained regular books of account. During the course of assessment proceedings, the assessee explained that he is registered under the Punjab Vat Act, 2005 and filing regularly quarterly vat returns online with the narration of complete purchase, payments received, labour paid, input vat and output vat. The assessee also explained that without maintaining regular books of account quarterly vat return cannot be filed online. The assessee submitted all the bills/vouchers of diesel, petrol Rs. 85,697. Hire charges Rs. 49,382, insurance Rs. 12,423, repair and maintenance Rs. 51,919 and car account to claim depreciation Rs. 1,34,647. The assessee also explained that he has taken value of four plots in its books of account including stamp duty and miscellaneous expenses. The value of plots mentioned by the learned Income-tax Officer, Barnala is only of sale deal. The assessee produced Smt. Amandeep Kaur to whom Rs. 50,000 was advanced. The assessee paid freight Rs. 1,43,491 during the year under consideration. The assessee explained that he paid freight less than Rs. 20,000 in single transition and less than Rs. 50,000 in the year to any transport.

5. The books of account were duly audited by the chartered accountant Vishav Jyoti Mahajan and Co. on September 16, 2010. In spite of all these the learned Income-tax Officer, Barnala rejected the books of account under section 145(3) of the Income-tax Act, 1961 and made assessment under section 143(3) of the Income-tax Act.

6. The comments of the Assessing Officer were called for which are reproduced in the impugned order in which the Assessing Officer has relied upon the findings given in the assessment order and also briefly explained that the assessee could not file any proof of payments of labour payable and bonus. The assessee could not file the required details and reply regarding the expenses were also not filed as per queries. The assessee could not file justification for valuation of the closing stock. No explanation was filed with documentary evidence for advancement of the loans. The assessee also reiterated the submissions already made.

7. The learned Commissioner of Income-tax (Appeals) considering the submissions of both parties and material on record confirmed the rejection of the books of account, however directed to reduce the net profit rate from 12 per cent. to 5 per cent. and directed the Assessing Officer to recompute the income. His findings in para 4.4 of the appellate order are reproduced as under:

“4.4 Thereafter, the Assessing Officer in his comments again relied on the assessment order. From the submissions of the appellant and the Assessing Officer it is noted that the primary issue in this case is verification regarding the labour expenses. The appellant had submitted that the labour register has been submitted during the assessment proceedings. However, the Assessing Officer contended that the same is not furnished in the desired performa. It is noted from the assessment order that the vouchers regarding payment of labour has not been produced before the Assessing Officer. In respect of other expenses the appellant has submitted that details are duly produced during the assessment proceedings which is not rebutted by the Assessing Officer. It is also noted that the turnover as shown by the appellant has been accepted by the Assessing Officer and there is no dispute as far as gross receipt is concerned. However, on perusal of copy of Muster Roll as submitted by the appellant, it is noted that it does not contain confirmation of the recipients in the form of signature/thumb impression, etc. The Assessing Officer has also contended that the vouchers for labour payment has also not been produced. Therefore, the veracity regarding the quantum of this expense is not conclusively proved. Further, the work agreements are not produced. Therefore, looking into the facts of the case, I am of the opinion that books of account are correctly rejected by the Assessing Officer under section 145(3) of the Income-tax Act, 1961.

However, as regards the estimation of profit after rejection of books of account, the hon’ble Income-tax Appellate Tribunal, Chandigarh in the case of M/s. Harbhajan Singh and Co. No. 183/CHD/ 2013 dated April 15, 2013 has observed that even after rejection of books of account past history of the assessee is the best guide to ascertain and determine the trading results of particular year. Thus, even after rejection of books of account, the past history of the assessee has to be applied and adopted for the purpose of estimation of profit. The appellant has submitted that in his case in the assessment year 2005-06, the assessment is completed under scrutiny and net profit at 2.84 per cent. is estimated by the Assessing Officer against the net profit declared at 2.61 per cent. on turnover of Rs. 1,07,15,819. As per submission made, during the assessment year 2005-06, the claim on account of labour payment is Rs. 63,86,315 and labour payable is shown at Rs. 6,00,000. In this year, i.e., assessment year 2010-11 turnover is Rs. 2,24,73,965 and the net profit shown by the appellant is 2.19 per cent. The claim of labour expenses as mentioned by the Assessing Officer is Rs. 44,60,202 out of which Rs. 23,00,000 is shown as payable. Therefore, the claim of labour expenses is less in this year compared to the assessment year 2005-06. Therefore, looking into the entirety of the facts of the case, I am of the opinion that the net profit be estimated at 5 per cent. of the gross receipt shown by the appellant. Thus, the net profit is increased by 2.81 per cent. over and above the net profit declared by the appellant. The Assessing Officer is directed to give effect accordingly. Thus, ground Nos. 1 to 5 is partly allowed.”

8. The Revenue is in appeal challenging the reduction of the net profit rate from 12 per cent. to 5 per cent. The assessee in the cross-objection has challenged the order of the learned Commissioner of Income-tax (Appeals) in confirming the rejection of the books of account and application of net profit rate of 5 per cent.

9. The learned Departmental representative relied upon the orders of the Assessing Officer and submitted that in the cases of the contractors, the profit rate of 10 per cent. to 12 per cent. has been applied and have been confirmed by the hon’ble High Court. The details of such cases are filed as under :

The Chandigarh Bench of the Tribunal in this case vide its judgment in I.T.A. No. 381/CHD/2004 has upheld the application of net profit rate of 12 per cent. subject to no further deduction on account of depreciation.

10. On the other hand, learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that it was a work assigned by the Defence Ministry (Air Force) therefore, permanent labour is to be applied and all the documents thereafter, are taken away by the Defence Authority for the purpose of secrecy of the work conducted by the assessee. Therefore, in certain items, the complete details could not be filed. He has submitted that in the year under appeal, the assessee has declared net profit rate of 2.19 per cent. and in preceding assessment year net profit rate was 2.22 per cent. and 3.17 per cent., therefore, the profit rate applied by the learned Commissioner of Income-tax (Appeals) at 5 per cent. is still on excessive side. He has filed copies of unreported orders of the Income-tax Appellate Tribunal, Chandigarh Bench and Amritsar Bench in which, in the cases of contractors, the profit rate of about 6 per cent. has been applied.

11. We have considered the rival submissions. The authorities below have given the reasons for rejection of the books of account. The assessee has failed to verify the genuineness of the opening and closing balance of labour payable. The details called for by the Assessing Officer were not furnished. The assessee failed to justify the quantitative and qualitative details of the closing stock. The queries raised by the Assessing Officer were not properly addressed. Therefore, these were the sufficient reasons for rejection of the books of account by the Assessing Officer. The findings given by the Assessing Officer are thus, not rebutted by the assessee to the satisfaction of the authorities below. Even during the course of arguments, learned counsel for the assessee could not specify as to what is the illegality in the orders of the authorities below in rejecting the books of account. Therefore, considering the findings of fact recorded by the authorities below for rejection of the books of account, we do not find any justification to interfere with their orders for rejection of the books of account. The cross-objection of the assessee is therefore, liable to be dismissed on this ground.

12. Now the issue left for consideration is the reasonableness of the profit rate applied by the authorities below. The Assessing Officer has applied the profit rate of 12 per cent. for estimating the income of the assessee, however the history of the assessee suggests that the assessee at the maximum has shown net profit rate of 3.17 per cent. In certain decisions of the Income-tax Appellate Tribunal, Chandigarh Bench and Amritsar Bench, the profit rate of 6 per cent. has been applied as is argued by learned counsel for the assessee. However, the learned Departmental representative has relied upon the decision of the Chandigarh Bench in which profit rate of 10 per cent. to 12 per cent. in the cases of the contractors have been applied and the same have been confirmed by the High Court as well. Therefore, considering the totality of the facts and circumstances, history of the assessee and objections raised by the Assessing Officer for rejection of the books of account, it would be reasonable and appropriate to apply profit rate of 8 per cent. as against 5 per cent. applied by the learned Commissioner of Income-tax (Appeals) because the learned Commissioner of Income-tax (Appeals) has failed to note that substantial defects have been pointed out in maintenance of the books of account which could not give the true picture of the profit earned by the assessee. Therefore, instead of reducing the substantial profit rate in the facts and circumstances, the learned Commissioner of Income-tax (Appeals) should have decided the issue in the light of the finding of fact given by the Assessing Officer. We, therefore, considering the submission of both parties and the decisions relied upon by both parties and considering the objections raised by the Assessing Officer, find it reasonable and appropriate to estimate the profit in the case of the assessee by applying net profit rate of 8 per cent. The order of the learned Commissioner of Income-tax (Appeals) to that extent is, therefore, modified and we direct the Assessing Officer to apply net profit rate of 8 per cent. against the receipts disclosed by the assessee for the purpose of computing the business income of the assessee.

13. In the result, the Departmental appeal is partly allowed and the cross-objection of the assessee is dismissed.