Sriram Jhanwarlal Vs. Income Tax Officer - Court Judgment

Excerpt:
1. these two appeals by the assessee emanate from the orders passed by the cit(a) on 17th dec., 2004 in relation to asst. yrs. 1997-98 and 1998-99. since common issues are raised in both the appeals, we are, therefore, proceeding to dispose them of by this common order for the sake of convenience.2. ground no. 3 is against the unlawful picking of the case for scrutiny assessment. we have heard the rival submissions and perused the relevant material on record. recently, the hon'ble supreme court in the case of pahwa chemicals (p) ltd. v. cce has held as under : "if, therefore, the act vests, in the central excise officers jurisdiction to issue show-cause notices and to adjudicate, the board has no power to cut down that jurisdiction. however, for the purposes of better administration of levy and collection of duty and for the purpose of classification of goods the board may issue direction allocating certain types of work to certain officers or classes of officers. circulars issued by the board dt. 27th feb., 1997, and 13th aug., 1997 are nothing more than administrative directions allocating various types of work to various classes of officers. these administrative directions cannot take away the jurisdiction vested in a central excise officer under the act. at the highest, all that can be said is central excise officers, as a matter of propriety, must follow the directions and only deal with the work which has been allotted to them by virtue of the circulars. even if an officer still issues a notice or adjudicates contrary to the circulars it would not be a ground for holding that he had no jurisdiction to issue the show-cause notice or to set aside the adjudication." in view of the clear enunciation of law by the highest court of the land, we do not find any substance in the contention raised by the learned authorised representative in this regard.3. now we take up the appeal on merits. briefly stated, the facts of this case are that the assessee filed return declaring income at rs. 38,867. the ao observed that most of the expenses were unvouched and some of the expenses were supported by internal vouchers but no details were available with them. the assessee was found not to have maintained muster roll for labour employed at the site. the vouchers for payment to labour were also not maintained. these facts were admitted by the assessee as is borne out from the first page of the assessment order.in the light of these facts, the ao invoked the provisions of section 145(3). he analyzed the expenditure on material, carriage and labour vis-a-vis gross receipts by dividing the year into two parts, namely, one from 1st april, 1997 to 31st aug., 1997 and the other from 1st sept., 1997 to 31st march, 1998. it was observed that as against the payments received in the later period amounting to rs. 3,55,739, the assessee had debited expenses of rs. 12,52,410. on being called upon to explain the reasons, it was stated that the payments against labour, wages and material used during the work done in the month of august, 1997 were made in the month of september, 1997 due to non-availability of funds. it was further noted that the assessee had claimed expenses on labour at rs." 19,97,010, which was at 47.2 per cent of the gross receipts. he considered another case of tolaram phusha ram wherein wages constituted 20 per cent of the gross receipts. in order to arrive at fair estimate of assessee's profit of this year, he held that the opening work-in-progress/stock of this year be taken at rs. 6,65,034 (equal to 75 per cent of the payment of rs. 8,86,712 received during this year for work done during the preceding year). by considering this amount as opening work-in-progress, he observed that the assessee had incurred expenses upto 31st july, 1997 at rs. 25,33,551. he, therefore, .held that the deduction of direct expenses from the gross receipts of the whole year at 75 per cent would be reasonable. the amount of expenditure in excess of 75 per cent at rs. 5,88,530 was disallowed. in the first appeal, the learned cit(a) upheld the rejection of book results and also sustained the action of the ao in which the aforesaid addition was made to work out net profit rate at 21.97 per cent.4. it was argued by the learned authorised representative that the ao had no basis at all to estimate the expenditure at 75 per cent of the gross receipts. it was contended that the arbitrary action of the ao led to the making of huge addition, which raised the net profit rate to 21.97 per cent as against 8.05 per cent declared by the assessee. he invited our attention towards p. 2 of the paper book, being the written submissions made before the learned cit(a), extracting net profit rate of the preceding years, after claim of deduction for depreciation, ; interest and remuneration to partners at 10.15 per cent, 8.99 per cent and 8.76 per cent for asst. yrs. 1995-96 to 1997-98, respectively. he took us through several orders passed by this bench in which net profit rate of 8 per cent has been held to be applicable even though the gross receipts exceeded the amount specified under section 44ad. it was shown that the tribunal in these cases has applied 8 per cent profit rate by taking assistance from the rate stipulated in section 44ad. in the opposition, the learned departmental representative strongly relied on the impugned order. it was submitted that the ao had done a good exercise to unearth the discrepancies and bring on record the clear picture of profit.5. we have heard the rival submissions and perused the relevant material on record. it is obvious that the assessee had not maintained books of account in a manner which could assist the computation of correct income. it has also been conceded by the assessee before the ao with regard to non-maintenance/irregular maintenance of vouchers in support of expenses. in these circumstances, we are of the considered opinion that the application of provisions of section 145(3) by the ao was justified. after rejecting the book results, the ao does not get unfettered powers to make assessment at any income. he is supposed to be guided either by the previous results of the assessee or some comparable cases. in the instant case, the ao has allowed deduction of direct expenses at 75 per cent of the gross receipts without any cogent material. his ad hoc estimate of expenses divorced from the relevant facts cannot be upheld. we have also gone through the detail of income furnished by the assessee, which shows net profit at 8.05 per cent. in this' calculation, the assessee had determined net profit at rs. 3,40,350 before depreciation, interest and remuneration to partners. if the amount of depreciation of rs. 49,234 is reduced, this net profit comes at rs. 2,91,116. its ratio of gross receipts comes at 6.88 per cent. it is the same manner in which the assessee had shown working of net profits in the earlier three years as well. it is no doubt true that the assessee had gross receipts of rs. 42,27,946 in this year and the case did not strictly fall within the parameters laid down under section 44ad. however, in order to determine the correct rate of profit, we are regularly-seeking guidance from this section and applying 8 per cent net profit rate. this net profit rate is further subject to interest and remuneration to partners as provided in proviso to section 44ad(2). in our consideration opinion, it would be fair and reasonable if the total income of the assessee is computed in this manner. by translating it into the actual calculation, the amount of net profit after depreciation but before remuneration and interest to partners comes at rs. 3,38,236. the amount of salary and interest to partners has been shown at rs. 2,52,249. if this amount is deducted, the taxable income comes at rs. 85,987. we hold this amount to be taxable income liable for taxation.7. pursuant to the order passed for asst. yr. 1998-99, the ao issued notice under section 148 on the ground that the assessee had not shown any amount on account of work-in-progress for asst. yr. 1997-98 whereas there was work-in-progress which was estimated by the ao at 75 per cent of rs. 8,86,712 that came to rs. 6,65,034. in the year under consideration, he estimated the value of work-in-progress at 30 per cent of such receipts at rs. 8,86,712 and made addition of rs. 2,66,014. in the first appeal, the learned cit(a) confirmed the action of the ao. it is the common submission by both the sides that the facts of this year are similar to that of the preceding year. in this year, the assessee had shown his working of net profit at 8.8 per cent on the gross receipts of rs. 46,16,214 before the claim of deduction on account of depreciation, salary and interest to partners. the amount of profit has been shown at rs. 4,10,009 and the amount of depreciation at rs. 31,400. if the depreciation is excluded, the net profit before salary and interest to partners comes at rs. 3,78,609, which is 8.2 per cent of the gross receipts. as the actual amount of net profit declared by the assessee is more than 8 per cent of the gross receipts, considering the view taken in asst. yr. 1998-99, we hold that no further addition is called for. apart from that, we are unable to appreciate the reasoning given by the ao in making addition of rs. 2,66,014 by estimating work-in-progress at 30 per cent of the amount received in the next year on the premise that it related to this year.as the said amount of receipt of rs. 8,86,712 has been included in the gross receipts for asst. yr. 1998-199 while computing 8 per cent net profit rate, there is no logic in again tracing it back to the asst.yr. 1997-98. in view of these facts, we overturn the impugned order and hold that the income declared by the assessee in his return be accepted.

Judgment:
1. These two appeals by the assessee emanate from the orders passed by the CIT(A) on 17th Dec., 2004 in relation to asst. yrs. 1997-98 and 1998-99. Since common issues are raised in both the appeals, we are, therefore, proceeding to dispose them of by this common order for the sake of convenience.

2. Ground No. 3 is against the unlawful picking of the case for scrutiny assessment. We have heard the rival submissions and perused the relevant material on record. Recently, the Hon'ble Supreme Court in the case of Pahwa Chemicals (P) Ltd. v. CCE has held as under : "If, therefore, the Act vests, in the Central Excise Officers jurisdiction to issue show-cause notices and to adjudicate, the Board has no power to cut down that jurisdiction. However, for the purposes of better administration of levy and collection of duty and for the purpose of classification of goods the Board may issue direction allocating certain types of work to certain officers or classes of officers. Circulars issued by the Board dt. 27th Feb., 1997, and 13th Aug., 1997 are nothing more than administrative directions allocating various types of work to various classes of officers. These administrative directions cannot take away the jurisdiction vested in a Central Excise Officer under the Act. At the highest, all that can be said is Central Excise Officers, as a matter of propriety, must follow the directions and only deal with the work which has been allotted to them by virtue of the circulars.

Even if an officer still issues a notice or adjudicates contrary to the circulars it would not be a ground for holding that he had no jurisdiction to issue the show-cause notice or to set aside the adjudication." In view of the clear enunciation of law by the highest Court of the land, we do not find any substance in the contention raised by the learned Authorised Representative in this regard.

3. Now we take up the appeal on merits. Briefly stated, the facts of this case are that the assessee filed return declaring income at Rs. 38,867. The AO observed that most of the expenses were unvouched and some of the expenses were supported by internal vouchers but no details were available with them. The assessee was found not to have maintained muster roll for labour employed at the site. The vouchers for payment to labour were also not maintained. These facts were admitted by the assessee as is borne out from the first page of the assessment order.

In the light of these facts, the AO invoked the provisions of Section 145(3). He analyzed the expenditure on material, carriage and labour vis-a-vis gross receipts by dividing the year into two parts, namely, one from 1st April, 1997 to 31st Aug., 1997 and the other from 1st Sept., 1997 to 31st March, 1998. It was observed that as against the payments received in the later period amounting to Rs. 3,55,739, the assessee had debited expenses of Rs. 12,52,410. On being called upon to explain the reasons, it was stated that the payments against labour, wages and material used during the work done in the month of August, 1997 were made in the month of September, 1997 due to non-availability of funds. It Was further noted that the assessee had claimed expenses on labour at Rs." 19,97,010, which was at 47.2 per cent of the gross receipts. He considered another case of Tolaram Phusha Ram wherein wages constituted 20 per cent of the gross receipts. In order to arrive at fair estimate of assessee's profit of this year, he held that the opening work-in-progress/stock of this year be taken at Rs. 6,65,034 (equal to 75 per cent of the payment of Rs. 8,86,712 received during this year for work done during the preceding year). By considering this amount as opening work-in-progress, he observed that the assessee had incurred expenses upto 31st July, 1997 at Rs. 25,33,551. He, therefore, .held that the deduction of direct expenses from the gross receipts of the whole year at 75 per cent would be reasonable. The amount of expenditure in excess of 75 per cent at Rs. 5,88,530 was disallowed. In the first appeal, the learned CIT(A) upheld the rejection of book results and also sustained the action of the AO in which the aforesaid addition was made to work out net profit rate at 21.97 per cent.

4. It was argued by the learned Authorised Representative that the AO had no basis at all to estimate the expenditure at 75 per cent of the gross receipts. It was contended that the arbitrary action of the AO led to the making of huge addition, which raised the net profit rate to 21.97 per cent as against 8.05 per cent declared by the assessee. He invited our attention towards p. 2 of the paper book, being the written submissions made before the learned CIT(A), extracting net profit rate of the preceding years, after claim of deduction for depreciation, ; interest and remuneration to partners at 10.15 per cent, 8.99 per cent and 8.76 per cent for asst. yrs. 1995-96 to 1997-98, respectively. He took us through several orders passed by this Bench in which net profit rate of 8 per cent has been held to be applicable even though the gross receipts exceeded the amount specified under Section 44AD. It was shown that the Tribunal in these cases has applied 8 per cent profit rate by taking assistance from the rate stipulated in Section 44AD. In the opposition, the learned Departmental Representative strongly relied on the impugned order. It was submitted that the AO had done a good exercise to unearth the discrepancies and bring on record the clear picture of profit.

5. We have heard the rival submissions and perused the relevant material on record. It is obvious that the assessee had not maintained books of account in a manner which could assist the computation of correct income. It has also been conceded by the assessee before the AO with regard to non-maintenance/irregular maintenance of vouchers in support of expenses. In these circumstances, we are of the considered opinion that the application of provisions of Section 145(3) by the AO was justified. After rejecting the book results, the AO does not get unfettered powers to make assessment at any income. He is supposed to be guided either by the previous results of the assessee or some comparable cases. In the instant case, the AO has allowed deduction of direct expenses at 75 per cent of the gross receipts without any cogent material. His ad hoc estimate of expenses divorced from the relevant facts cannot be upheld. We have also gone through the detail of income furnished by the assessee, which shows net profit at 8.05 per cent. In this' calculation, the assessee had determined net profit at Rs. 3,40,350 before depreciation, interest and remuneration to partners. If the amount of depreciation of Rs. 49,234 is reduced, this net profit comes at Rs. 2,91,116. Its ratio of gross receipts comes at 6.88 per cent. It is the same manner in which the assessee had shown working of net profits in the earlier three years as well. It is no doubt true that the assessee had gross receipts of Rs. 42,27,946 in this year and the case did not strictly fall within the parameters laid down under Section 44AD. However, in order to determine the correct rate of profit, we are regularly-seeking guidance from this section and applying 8 per cent net profit rate. This net profit rate is further subject to interest and remuneration to partners as provided in proviso to Section 44AD(2). In our consideration opinion, it would be fair and reasonable if the total income of the assessee is computed in this manner. By translating it into the actual calculation, the amount of net profit after depreciation but before remuneration and interest to partners comes at Rs. 3,38,236. The amount of salary and interest to partners has been shown at Rs. 2,52,249. If this amount is deducted, the taxable income comes at Rs. 85,987. We hold this amount to be taxable income liable for taxation.

7. Pursuant to the order passed for asst. yr. 1998-99, the AO issued notice under Section 148 on the ground that the assessee had not shown any amount on account of work-in-progress for asst. yr. 1997-98 whereas there was work-in-progress which was estimated by the AO at 75 per cent of Rs. 8,86,712 that came to Rs. 6,65,034. In the year under consideration, he estimated the value of work-in-progress at 30 per cent of such receipts at Rs. 8,86,712 and made addition of Rs. 2,66,014. In the first appeal, the learned CIT(A) confirmed the action of the AO. It is the common submission by both the sides that the facts of this year are similar to that of the preceding year. In this year, the assessee had shown his working of net profit at 8.8 per cent on the gross receipts of Rs. 46,16,214 before the claim of deduction on account of depreciation, salary and interest to partners. The amount of profit has been shown at Rs. 4,10,009 and the amount of depreciation at Rs. 31,400. If the depreciation is excluded, the net profit before salary and interest to partners comes at Rs. 3,78,609, which is 8.2 per cent of the gross receipts. As the actual amount of net profit declared by the assessee is more than 8 per cent of the gross receipts, considering the view taken in asst. yr. 1998-99, we hold that no further addition is called for. Apart from that, we are unable to appreciate the reasoning given by the AO in making addition of Rs. 2,66,014 by estimating work-in-progress at 30 per cent of the amount received in the next year on the premise that it related to this year.

As the said amount of receipt of Rs. 8,86,712 has been included in the gross receipts for asst. yr. 1998-199 while computing 8 per cent net profit rate, there is no logic in again tracing it back to the asst.

yr. 1997-98. In view of these facts, we overturn the impugned order and hold that the income declared by the assessee in his return be accepted.