The Pr. Commissioner Of Income Tax-9 v. Ibilt Technologies Ltd

$~21 * IN THE HIGH COURT OF DELHI AT NEW DELHI+ ITA 995/2018 Date of decision : 12[th] September, 2018 THE PR. COMMISSIONER OF INCOME TAX-9.....Appellant Through: versus IBILT TECHNOLOGIES LTD. ..... Respondent Through Mr. Ruchir Bhatia, Advocate CORAM:HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE CHANDER SHEKHAR SANJIV KHANNA, J.(ORAL): This is a peculiar case where the Assessing Officer had primarily rejected the book results declared by M/s IBILT Technologies Ltd. (respondent-assessee) for the Assessment Year 2007-08 on the ground that there was net loss of Rs.16.41 lacs, compared to net profit of Rs. 1.34 crores in the Assessment Year 2006-07. The explanation given by the respondent-assessee to justify and explain the book results for the Assessment Year 2007-08 were rejected with a simple observation that the explanation was not found to be complete and satisfactory. The Assessing Officer recomputed the taxable income at Rs. 2,13,72,000/- by applying gross profit ratio of 4%. 2. The Commissioner of Income Tax (Appeals) had noted detailed submissions made by the respondent-assessee to explain and elucidate the reason why there was a loss in the said year. For the sake of completeness, we would refer to the said submissions, which have been noted by the Commissioner of Income Tax (Appeals) in tabular form:- " S. Observations made by Ld. Our submissionRemarks No.AO 1. The assessee was Specific factorswhich causedloss of Rs. 16,41,966 duringTherefore the dentin the profitability of the company duringthe year isTaxation 186 given hereunder:(Gauhati) Dhakeshwari Sl Particulars AY 07-08 AY 06-07 Impact on Cotton Mills V/s. nprofit CIT 26 ITR 775 o (SC) 1 Other 12,013,9315,488,783,474,858 income 1 9Puspanjali Dying 2 Depreciatio32,386,4524,519921 7,866,529 & Printing Mills n 0 (P) Ltd. 72 TTJ 3 Finance 11,337,898,648,891 2,689,003 886 (AHD) cost 4 4 Payment to 14,53,39,41293, 3,24,00,22Raghubar & provision 92 9271 1 Mandal Harihar for Mandal V/s State employee of Bihar 8 STC 5 Cost of 35,89,83,319,94,81,715,95,01,6770 (SC) service, 98 10 88 administratiAluminium on Industries (P) 6 Net profit (1,641,96613,471,29Ltd. V/s CIT )1 GLR 216 (GAU) Calcutta From the above table, it is clear that the above factors have Discount Pvt. caused a huge reduction in profit for the year. Ltd, V/s 91 ITR 8 (SC) Also we are enclosing comparative chart for the Assessment years 2004-05, 2005-06, 2006-07, 2007-08 & 2008-09 showing net profit & turnover. Refer Annexure-1 " 3. It is not disputed and challenged that the respondent-assessee was engaged in supplying computer equipment, networking equipment and computer software on turnkey basis, primarily to government department/bodies and government companies. They were also providing warranty, annual maintenance contract and facility management services for up to five years. The contracts awarded to them were on tender basis. Further, the respondent-assessee was purchasing equipments from reputed original equipment manufacturers (OEMs) like IBM, HP, ORACLE, Cisco, Dlink, Dax, Redhat, Acer, Sun etc. The assessment order states that there was exponential increase in the turnover from Rs.34.36 crore in the last year to Rs.53.43 crore in the current year, and the respondent-assessee had explained that to meet the commitments, they had recruited employees. The respondent-assessee had produced books of accounts including cash book and ledgers, going into nine volumes along with the vouchers. To justify and explain drop and decrease in operating profits the respondent-assessee had produced and furnished details as is apparent from the chart/table quoted above. were on tender basis. Further, the respondent-assessee was purchasing equipments from reputed original equipment manufacturers (OEMs) like IBM, HP, ORACLE, Cisco, Dlink, Dax, Redhat, Acer, Sun etc. The assessment order states that there was exponential increase in the turnover from Rs.34.36 crore in the last year to Rs.53.43 crore in the current year, and the respondent-assessee had explained that to meet the commitments, they had recruited employees. The respondent-assessee had produced books of accounts including cash book and ledgers, going into nine volumes along with the vouchers. To justify and explain drop and decrease in operating profits the respondent-assessee had produced and furnished details as is apparent from the chart/table quoted above. 4. Learned counsel for the Revenue states that the respondent-assessee had not declared any opening and closing stock. He relies on the assessment order. However, the Assessing Officer did not examine and deal with the contention and plea raised by the respondent-assessee, duly taken into consideration by the Commission of Income Tax (Appeals), that supply orders were directly placed with the OEM, who had then made the supplies to the customers. Accordingly, the respondent-assessee did not keep or maintain stock-in-hand. In this manner, the respondent-assessee had cut down on their inventory costs, to ensure better profitability. 5. The Assessing Officer should have verified and examined the details of the purchases made and the supplies made, ascertaining whether or not there was any lapse in not declaring opening and closing stock. The books of accounts could not have been rejected on the ground that no opening or closing stock was declared, without the said exercise being undertaken. 6. The other reason given by the Assessing Officer to reject the books of accounts and make best judgment assessment was that the respondent-assessee had written back substantial amount of Rs.1.13 crore and had also claimed provision for doubtful advances of Rs.17,90,884/-. The respondent-assessee had explained that they had acquired informatic division from M/s Crompton Greaves Ltd., with the objective of consolidating similar types of business under one company effective from 1.7.2005. As per terms, the respondent-assessee had agreed to take over future liability of the division towards unexpired warranty and the AMC. Clearly, the Assessing Officer did not consider the submission made and had failed to deliberate upon explanation given by respondent-assessee. With regard to the amounts written back, it was stated that these were expenses which had been incurred or paid and accordingly debited to the profit and loss account. Reference could made to the chart/table reproduced above from the order of the Commissioner of Income Tax (Appeals). 7. Section 145 (2) of the Act empowers the Assessing Officer to make best judgment assessment when he is not satisfied with correctness or completeness of the accounts of the assessee. Best judgment assessment in terms of Section 145 can also be framed when no method of accounting has been regularly followed or where the method employed is such that the income, profit and gains cannot be properly deduced therefrom. 8. Books of accounts were not rejected by the assessing Officer as unreliable on the ground that transactions were omitted, proper particulars and vouchers were not forthcoming or there were inherent lacunas and other defects. The two/three feeble reasons given by the Assessing Officer for rejecting the book results have not been accepted by the appellate authorities. Reasons and explanation given by the respondent-assessee regarding opening/closing stock, amount written back etc. have been accepted. It is not the case that the method of accounting deployed was not regularly followed or it was not possible to deduce profit and gains from the method deployed. The Assessment Order is silent and does not comment and state that the books of accounts were incomplete, incorrect or unreliable. 8. Books of accounts were not rejected by the assessing Officer as unreliable on the ground that transactions were omitted, proper particulars and vouchers were not forthcoming or there were inherent lacunas and other defects. The two/three feeble reasons given by the Assessing Officer for rejecting the book results have not been accepted by the appellate authorities. Reasons and explanation given by the respondent-assessee regarding opening/closing stock, amount written back etc. have been accepted. It is not the case that the method of accounting deployed was not regularly followed or it was not possible to deduce profit and gains from the method deployed. The Assessment Order is silent and does not comment and state that the books of accounts were incomplete, incorrect or unreliable. 9. If there is fall in the gross profit ratio, reasons and grounds given by the respondent/assessee have to be examined objectively, fairly and in a non-partisan manner. Past results could be a good reason to conduct detailed verification, albeit would not be the only ground and reason to make addition by rejecting the books of accounts. Good and cogent reason why the financial results should be rejected has to be given. Books of accounts cannot be rejected as the respondent-assessee has suffered losses, where as in the immediate earlier year profit was made. Fall in gross profit ratio could be due to various reasons, and cannot be the sole and only ground to reject the book results in entirety and frame best judgment assessment [see Commissioner of Income Tax-XII v. Poonam Rani(2010) 326 ITR223, Action Electricals v. Deputy Commissioner of Income Tax(2003) 180 CTR 62]. The reasoning given in the assessment order to compute income on hypothetical basis by applying gross profit ratio of 4% is completely fallacious, wrong and is contrary to well-settled law, as expounded vide judgments reported as Commissioner of Income Tax, West Bengal v.Calcutta Discount Co. Ltd., (1974) 3 SCC 260,Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal, (1954) 26 ITR 775 (SC)and Raghubar Mandal Harihar Mandal v. State of Bihar,AIR 1957 SC 810.10. The present appeal has no merit and the same is dismissed inlimine. SANJIV KHANNA, J SEPTEMBER 12, 2018/tp CHANDER SHEKHAR, J