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Ayyori Shankariah Ashanna, 194/23, Ground floor, Off. Grants Building Chawl, Arthur Bunder Road, Colaba, Mumbai-400 005 Vs. ITO-12(2)(3), Mumbai.
June, 25th 2015
                      MUMBAI BENCHES `A' MUMBAI


                               ITA No.4001/Mum/2010
                               Assessment Year: 2006-07

     Ayyori Shankariah Ashanna,                      ITO-12(2)(3),
     194/23, Ground floor,                           Mumbai.
     Off. Grants Building Chawl,              Vs.
     Arthur Bunder Road, Colaba,
     Mumbai-400 005

       (Assessee-Appellant)                            (Respondent)
     P.A. NUMBER : AAAPA6928K

                   Assessee by :             Shri Bhupendra Shah
                   Revenue by :              Shri Asghar Zain

            Date of Hearing        :                         24/03/2015
            Date of Pronouncement :                          22/06/2015


Per Sanjay Arora (AM):
       This is an Appeal by the Assessee agitating the Order by the Commissioner of
Income Tax(Appeals)-23, Mumbai (`CIT(A)' for short) dated 02.03.2010, dismissing
the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act,
1961 (`the Act' hereinafter) dated 31.12.2008 for Assessment Year (AY) 2006-07.

2.     The appeal raises two grounds, as under, which we shall take up in seriatim:
       1.     The Ld. CIT(A) has erred in confirming the addition of Ld. AO rejecting the
              books of account and estimating the net profit @ 8%.
       2.     The Ld. CIT(A) has erred in confirming the addition u/s. 68 of Rs. 8,01,400/-
              on account of unexplained creditors.
                                                      ITA No.4001/M/10 Ayyori Shankariah Ashanna

3.     The first ground relates to the rejection of the assessee's accounts and
estimation of its income at 8% of the turnover, as against the returned net profit of
2.75% of the gross receipt. It shall be relevant to state the background facts of the
case. The assessee, an individual, is a labour and civil contractor, carrying the said
business under the proprietary concern by the name, M/s. Satyanarayan Constructions.
Though apparently maintaining its accounts on mercantile basis of accounting, even as
reported in the Tax Audit Report (TAR), forming part of his return of income; the
assessee's accounts being subject to audit u/s. 44AB of the Act, no bills/invoice (or
running bill) in respect of the work completed, were produced before the Assessing
Officer (AO) despite being specifically called for. The assessee explained that the
work carried out and certified by the engineers of the contractees, being Government
Departments, as Garrison Engineers (NW), CPWD, Indian Institute of Geomagnetism,
MTNL & BSNL, stands duly accounted for on the basis of the TDS certificate/s
issued by the said concerns. The AO found the same unacceptable. The assessee
would in any case be required to raise a bill, which may be validated by the inspecting
staff of the contractee. The deduction of tax at source (TDS) would arise only on the
credit to the assessee's account, or on payment; the government departments generally
following cash method of accounting, and which may not necessarily be on the
passing of the bill, and which may itself not coincide with the raising of the bill, even
as work to that extent has been done, and would therefore require being accounted for
where accounts are maintained following accrual method of accounting. Further, even
if, procedurally, the bill is raised after certification, the assessee would only have a
record of the same, while none was produced; rather, admittedly not maintained. In
fact, the assessee's claim of the sales being booked on the date of TDS was found
incorrect on facts, with the AO citing two examples in the case of Garrison Engineers
for a total of Rs. 30.98 lacs. Again, query with the said concern revealed the assessee
to have raised four bills during f.y. 2005-06, the relevant previous year, even as TDS
thereon stood deducted by the drawee (payer) during the following year. Clearly, these
bills ought to be accounted for the current year.
       Continuing further, examining the payments to labour, payments during the
month of March, 2006 were found to have been made to 18 different labour

                                                     ITA No.4001/M/10 Ayyori Shankariah Ashanna

contractors, in sums ranging between Rs. 48,375/- to Rs. 49,995/-. In the view of the
AO, it was inconceivable that the assessee had assigned the contract for a single site,
i.e., Lion Gate, to 18 different contractors. The same was only to make believe, with a
view to avoid payment of TDS u/s. 194C of the Act. Further on, the assessee did not
maintain any stock records, with in fact it disclosing nil inventory of raw-material as
at the close of the current year, even as he purchases the same as well as makes
payments to labour contractors at Rs. 13.49 lacs and Rs. 8.55 lacs respectively during
the month of March, 2006.
       Further still, the assessee's final accounts disclose a total outstanding of Rs.
19.10 lacs as at the year-end, i.e., on 31.03.2006. The same was stated to include
outstanding toward salary, wages and labor contractors for the month of March, 2006,
aggregating to Rs. 11.08 lacs. The same had not been found to be representing actual
expenditure. Even excluding the same would still leave a balance of Rs. 8.01 lacs, no
details in respect of which were furnished. In view of these discrepancies, which were
not satisfactorily explained, being, rather, in the nature of anomalies, the AO rejected
the assessee's accounts u/s. 145(3) of the Act and estimated its net profit at 8% of the
sales for the year (at Rs. 260.91 lacs), making, resultantly, a net addition of Rs.
13,73,083/-. The same stood confirmed in appeal for the same reasons, so that,
aggrieved, the assessee in second appeal.

4.     The background facts in relation to the assessee's second ground are that the
assessee's final accounts reflected the outstanding qua sundry creditors as at the year-
end at Rs. 30.18 lacs, which were disclosed to be in respect of 4 parties, as under,
ledger accounts of which, as appearing in the assessee's accounts, were submitted
during the course of the assessment proceedings, i.e., Shree Krishna Construction,
Chandradeep Enterprises, Sanjay Petro Products and Panavi Petrochemicals. A
comparison with the assessee's accounts, as appearing in their books of account,
obtained through notices u/s. 133(6), revealed differences, which the assessee was
unable to explain. Again, there were transactions in the form of cash payments, which
were inexplicable, as, for example, cash payments in the range of Rs. 16,540/- to Rs.
19,600/- to M/s. Shree Krishna Constructions on 27 different occasions during the

                                                       ITA No.4001/M/10 Ayyori Shankariah Ashanna

months of February and March, 2006. The differences as observed in the accounts of
sundry creditors were essentially on account of differences in the opening balance,
i.e., on account of brought forward difference/s, and which, therefore, pertained to and
would require adjustment/s being made to the assessee's income for the preceding
year/s. No separate addition for this sum, however, was made, even as the AO added
the entire unexplained trade liability of Rs. 8,01,400/-, i.e., for which the details could
not be furnished, u/s. 69 of the Act, and which forms the subject matter of the
assessee's second ground. The addition being confirmed by the first appellate
authority, again on the same basis, the assessee is in appeal before us.

5.     We have heard the parties, and perused the material on record.
5.1    We find no merit in the assessee's case qua the invocation of section 145(3) of
the Act, i.e., given the unexplained discrepancies and, in fact, anomalies, observed in
its accounts by the assessing authority. Stock taking is essential to computation of
commercial profit, representing the un-billed work as at the year in. It cannot be, and
has not been shown, that the assessee has adopted a matter of ascertaining the work-
in-progress as at the year-end. Its claim of the entire work up to the close of the year
being certified is, again, wholly unsubstantiated. Rather, and on the contrary, it admits
to having no such record, claiming only the credit allowed on the deduction of tax as
the time of accrual of income, belying its stated accounting policy of recognizing
revenue on the delivery of goods or rendering of services. The certification of work;
raising the bill on a customer; and its' passing at its' end, are three separate and
distinct stages involved in the process of revenue recognition. Unless uncertainty as to
final recovery exists, and which has not been shown ­ which would again have to be
bill-wise, raising of the bill on the customer would be the stage of revenue
recognition. The non-raising of the bill, where so, is itself a serious flaw, and which
has in fact been found as untrue. Even if, as stated, no bill is raised, and the work as
certified (by the customer) is taken as a surrogate, toward serving the purpose of
recognizing revenue where there is no ambiguity about rate/s, the same has again not
been shown. Uncompleted work as at the year-end, or the work undertaken since the
last certification, would in any case require being accounted (refer: CIT v. A.

                                                       ITA No.4001/M/10 Ayyori Shankariah Ashanna

Krishnaswami Mudaliar [1969] 53 ITR 122; Chainrup Sampatram v. CIT [1953] 24
ITR 481 (SC)). In fact, certification, or even the running bill, has nowhere been
shown, and which may not necessarily coincide with the year-end, necessitating
assessment and valuation of the uncertified work for the purpose of its accounting.
       That apart, there are serious anomalies observed, viz. unexplained credits;
unverifiable expenditure, etc. in the assessee's accounts (refer paras 3, 4 of this order).
No improvement in its case stands made by the assessee. The rejection of the
assessee's accounts as unreliable for the purpose of determining his income for the
year, is, thus, clearly on a firm footing. The next question is of estimation of income,
which has been made at 8% of the gross receipt. The assessee has not adduced any
evidence at any stage to show it as being excessive; rather, the various discrepancies,
for which the AO did not, and only rightly so, make any separate
additions/disallowances, viz. closing stock, unverifiable expenditure, etc., corroborate
the inference of the assessee's accounts as not disclosing the correct profit and, in fact,
suppressing profit. We are, under the circumstances, inclined to uphold the estimation
of profit @ 8% of sales, a purely factual matter, and for which we may though refer to
the decisions, as in S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC) and
Brij Bhushan Lal Pardhuman Kumar v. CIT [1978] 115 ITR 524 (SC), explaining the
law in the matter.

5.2    Coming to the second addition, we approve the observation by the ld. CIT(A),
while rejecting the assessee's claim of estimation of income, invoking s. 145(3) of the
Act, that no further adjustment on account of outstanding liability is required or liable
to be made where shown to be qua trade. The qualification is that the same should
pertain to the current year. We may explain our decision, which is informed by
reasons different from that which prevailed with the first appellate authority. It is,
firstly, nowhere shown that the unexplained credit/s being impugned are in respect of
cash credit/s, as stated by the ld. CIT(A); the assessee having not as much as furnished
any details in its respect. As explained by the apex court in CIT v. Devi Prasad
Vishwanath Prasad [1969] 72 ITR 194 (SC) and CIT v. Manick Sons [1969] 74 ITR 1
(SC), there is nothing in law to preclude assessment of unexplained credit in the

                                                        ITA No.4001/M/10 Ayyori Shankariah Ashanna

assessee's books, where the same stand rejected and his business income estimated by
the assessing authority. The assessee could though make out a case for telescoping of
the said credit/s against the income added on estimation. In fact, the tribunal in Muni
Rai v. Asst. CIT (in ITA Nos. 29 & 30/Pat/10112 dated 28/5/2015) explained that the
said decisions by the apex court would apply in case of unexplained trading liabilities
as well, even as the argument as taken by the assessee is valid qua the outstanding
trading liability only where it pertains to the current year and, further, to the extent of
the adjustment to the profit as increased on estimation. That is to say, an adjustment of
Rs. 10 lacs on account of estimation would at best cover/telescope an addition on
account of unexplained liability to that extent only. In the present case, the assessee
having not furnished any details, it is not clear if the balance outstanding liability of
Rs. 8.01 lacs, for which addition has been made and sustained, is on account of cash
credit/s or a trading liability/s. Its year of origin is, again, not clear. We, accordingly,
restore the matter back to the file of the AO to allow the assessee an opportunity to
establish its claims, the onus for which is squarely on it. We may, however, clarify
that where the impugned sum/s is shown or established to be a trade liability/s, arising
during the current year, the same shall stand to be telescoped against the addition
made on the estimation of the income u/s. 145(3). We decide accordingly.

6.     In the result, the assessee's appeal is partly allowed for statistical purposes.
                   Order pronounced in the open court 22/06/2015

           Sd/-                                                 Sd/-
     (D. MANMOHAN)                                        (SANJAY ARORA)
     VICE PRESIDENT                                    ACCOUNTANT MEMBER

MUMBAI, Dated 22/06/2015

Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. The CIT(A)-23, Mumbai
4. CIT concerned
5. DR, ITAT, Mumbai
6. Guard file.

                     ITA No.4001/M/10 Ayyori Shankariah Ashanna

                         BY ORDER,
//True Copy//

                    (Dy./Asstt. Registrar)
                     ITAT, Mumbai

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