ORDER
[ENTITY], A.M. The appellant is a private limited company, engaged in supply of labourers on contract basis for loading of cement in railway wagons and trucks on behalf of various cement companies in the States of Gujarat and Maharashtra.
2. The appellant-company filed its return of income on 1-12-1996, showing total income, at Rs. 15,45,390. The income was assessed by the assessing officer vide assessment order dated 31-3-1999, on total income of Rs. 57,13,713. The following disallowance were made by the assessing officer out of various expenses cited by the assessee :
Disallowance out of the wages and, bonus to works as discussed above.
40,31,743
2. Disallowance out of salary given to lady director as discussed above.
48,000
3. Disallowance out of staff welfare, conveyance, travelling, festival and telephone expenses as discussed above (20 per cent of 1,80,581 + 19,460 + 1,52,675 + 51,124 + 28,460) 88,580 41,68,000 (sic)
3. The assessee preferred an appeal against the said order before the Commissioner (Appeals). The Commissioner (Appeals) vide its impugned order dated 23-8-1999, sustained disallowance of Rs. 8 lakhs out of Rs. 40,31,743 made by the assessing officer out of wages and bonus, etc. The Commissioner (Appeals) thus granted relief of Rs. 32,31,743. The revenue has preferred an appeal against the said relief granted by the Commissioner (Appeals). The assessee has also preferred an appeal against confirmation of the disallowance to the extent of Rs. 8 lakhs.
4. The Commissioner (Appeals) deleted the, disallowance of, Rs. 48,000, made in respect of remuneration paid to lady director [ENTITY]. The revenue has not challenged the aforesaid relief granted by the Commissioner (Appeals).
5. The Commissioner (Appeals) confirmed the disallowance made at the rate of 20 per cent out of aggregate expenditure of Rs. 4,42,000. He thus confirmed the disallowance to the extent of Rs. 88,580. The assessee has challanged the confirmation of such a disallowance in their appeal.
6. We will first deal with the disallowance made out wages and bonus by the assessing officer to the extent of Rs. 40,31,743. The assessing officer examined the wages register produced by the assessee to prove the payments of wages made to labourers. Out of 38 registers relating to payment of wages to labourers, four volumes of payments registers were sent by the assessing officer to fingerprint expert Prof. [ENTITY], [ENTITY], Jaipur, for his report whether the thumb impression and signature purported to be of different, persons in the said wages payment register were actually of only few individuals or those were of concerned different persons, as claimed by the assessee. The said expert gave his report and opined that fingerprints purported to be of five different persons as sampled in report No. 2 and two different persons as sampled in report No. 3 are respectively similar and identical as per such report. The assessing officer has discussed the other details mentioned in the report of the fingerprint experts in the assessment order and as made his report on annexure of the assessment order itself. The assessing officer on the basis of the aforesaid report, rejected the assessee's books of account and proceeded to estimate the assessee's income in accordance with the provisions of [SECTION]. The assessing officer observed that whole of the wage bill cannot be treated as wholly and exclusively incurred for business purposes and cannot be treated as genuine expenditure. In fact, 25 per cent of the wage bill is in the form of bogus payment. The reason is that out of the sample of thumb impression and signatures, more than 25 per cent were found to be bogus. The assessee has claimed vide letter dated 21-12-1990 that 15 labourers are required for one packer machine, whereas on page 2 of the contract for loading of cement dated 20-1-1994, it is stated that the contractor shall engage a maximum of 14 workmen per packer per shift for all the operations of packing for loading both Jumbo, ordinary wagons and trucks. The assessing officer observed that this also showed that the assessee has been claiming the deployment of excess labour and inflated wage bills without employing so much labour. The assessing officer accordingly disallowed 25 per cent of the total payment of wages and bonus to workers amounting to Rs. 1,61,26,972, which comes to Rs. 40,31,743.
7. The Commissioner (Appeals) considering the entire material on record held that disallowance made at the rate of 25 per cent out of total wage payments is not justified. The actual payment made to the 7 persons identified as having similar and identical thumb impression is stated to be Rs. 3 lakhs which has to be disallowed and the possibility of similar payments claim on the basis of such thumb impression cannot be ruled out. The Commissioner (Appeals), therefore, confirmed the ad hoc addition of Rs. 8 lakhs, which worked out to about 5 per cent of the entire payments and such a disallowance of Rs. 8 lakhs would give a net profit rate of 11.5 per cent given on gross receipts of the assessee against the past history of maximum 8 per cent. The Commissioner (Appeals) thus confirmed the addition of Rs. 8 lakhs and granted relief of Rs. 32,31,743.
8. The learned senior Departmental Representative Shri [ENTITY], strongly supported the order of the assessing officer. He contended that the Commissioner (Appeals) should have confirmed the total disallowance out of wages made by the assessing officer to the tune of Rs. 40,31,743. He read the assessment order word by word and laid emphasis on relevant findings and evidence whereever necessary. He also drew our attention to the report of the fingerprint expert which was annexed to the assessment order. Shri [ENTITY] submitted that the books of account maintained by the assessee were rightly rejected. The assessee has himself admitted profit of 16 per cent as is clear from the observations made by the learned Commissioner (Appeals) on pp. 4 and 8 of his order. The Commissioner (Appeals) has been extremely liberal in sustaining an addition of Rs. 8 lakhs which has resulted in net profit rate of only 11.5 per cent as against profit rate of 15 per cent. He strongly urged that the order of the Commissioner (Appeals) should be set aside and that of the assessing officer should be restored.
9. Shri [ENTITY], the learned senior advocate who represented the assessee before us pointed out that the appellant has maintained proper books of account which has duly been audited as per the provisions of the [ACT], as well as under [SECTION] of the [ACT]. The assessing officer has not pointed out any defects in the books of account nor he has found any specific mistake or discrepancy in any, of the recorded entries in the books of account.
10. The learned assessing officer has also erred in holding that 25 per cent of the wage payment is bogus. No material has been brought on record by the assessing officer to prove that any part of the wages payment made by the assessee is bogus or fictitious. The provisions of various labour laws, PF, etc. are applicable to the assessee. The labour authorities and PF authorities have not found any defect in the muster rolls, attendance register and payment registers maintained by the assessee. Shri [ENTITY] submitted that not a single wages earner has ever complained that he has not received the payment for wages or has received less payment of wages out of the payment shown to have been made by the assessee. Neither under the labour law nor under any other law, contravention of any statutory provision was ever noticed by any authority. The assessing officer has also not examined even a single wage earner. The assessing officer, simply sent four wages payment labourers, to the fingerprint expert out of 38 registers maintained by the assessee. Out of various payments, reflected in those four registers only seven thumb impressions were made the subject-matter of report by the said expert. He simply says that these thumb impressions appear to be identical or of same persons. This does not lead to the conclusion that payment to all the labourers were not made. It is, quite common that in labour oriented concerns, payments are some times made to the group leader. It is also prevalent that when any labourer cannot come personally to collect the amount, then he instructs his or her co-labourer or co-labourers to collect and the labourer collecting the amount pays to the wages earning labourer. The report of the expert does not lead to the conclusion that all those seven labourers did not exist nor it establishes that payment were not made to them as shown in the books of account.
11. Shri [ENTITY], submitted, that a copy of expert's report was given to the assessee at 5.30 p.m. on 30-3-1999 and the case was going to be time barred on 31-3-1999. No opportunity to make comments on the said report or to cross-examine the fingerprint expert or to furnish report from other fingerprint, expert was given. The entire disallowance has been made in violation of principles of natural justice.
12. Shri [ENTITY] submitted that even assuming that the books of account maintained by the assessee can be validly rejected under [SECTION] still the income of the assessee, has to be assessed in a just and fair manner. The best assessment can be made by comparing the assessee's own past history. The assessee ever since the inception in assessment year 1990-91 has been filing returns and paying taxes on its income. The accounts and other records have been maintained by the assessee in similar manner ever since assessment year 1990-91. The books of account so maintained by the assessee has also been accepted in the past. No such disallowance was made by the assessing officer. In assessment year 1990-91, the assessee disclosed a net profit rate of 4.94 per cent on contract receipts as per books of account which was accepted under [SECTION]. Again the assessment for 1993-94 was, listed for scrutiny assessment under [SECTION]. The assessee, declared an income of Rs. 5,09.940 on gross contract receipts of Rs. 1,16,19,340. The income was assessed finally at Rs.,5,30,000 resulting in net profit rate of 4.56 per cent. Like this, the past rate of net profit ranged between 4 per cent to 6.8 per cent, which were accepted in assessments made under [SECTION] or [SECTION]. The learned counsel also drew our attention to the comparative chart placed at page 23 of the P.B. which shown that the ratio of the wage payment and gross contract receipts for the year under consideration was 83.55 per cent as against 84.10 in assessment year 1993-94 which was assessed under [SECTION]. Like this the wage payment ranged between 83 per cent to 84 per cent in different years. During the year under assessment, it was 83.55 per cent which cannot be treated as unreasonable or excessive, Shri [ENTITY] further submitted that the assessing officer has failed to point out any comparative cases where the ratio of various payment on such contract receipts is lower than ratio of assessee's wage payments.
13. Shri [ENTITY] invited our attention towards detailed written submissions dated 23-6-1999, submitted before the Commissioner (Appeals). (copy placed at pp. 1 to 22 of the PB). He submitted that the appellant company keep supervisors/accountants at the site of work. The supervisors employ and engage labourers. Muster rolls are prepared by accountant/supervisor. Attendance is taken by the supervisor. Wages for every month based on such muster rolls, are paid and debited by the accountant in the account books. The payments to labourers are made by the employees of the appellant company, and no actual payment, thumb impression/signatures are obtained and recorded. The directors have not made any payment of wages to the labourers. The assessing officer has failed to prove that the impugned payments were not made and the money remained with the directors of the appellant company. He submitted that it is a prevalent practice that when any labourer cannot come personally to collect the amount, he instructs his co-labourer to collect the payment of wages. The supervisor being satisfied as to the identity and reliability of the co-labourers, obtains his/her signature/thumb impression on payment sheets. The payments made by the company are real and actual and none of the wage earners have ever complained of non-receipt. Shri [ENTITY] also relied on the decision of the Tribunal Jaipur Bench in the case of Shri [ENTITY] reported in 19 TW 60 in which penalty of Rs. 70,000 levied in respect of similar disallowance out of wage payment was deleted by the Tribunal. The Tribunal in para 15 of that order has observed that the explanation of the assessee that it is customary to receive payment on behalf of others, cannot be brushed aside. In that case, a disallowance of Rs. 1 lakh was sustained on the grounds that the assessee had agreed for such a disallowance before the departmental authorities. Shri [ENTITY] also relied upon the fact that similar practice was explained before the assessing officer in the case of M/s Bharat Construction Co. Udaipur in the assessment proceedings for assessment year 1994-95.
14. Shri [ENTITY] submitted that the reliance placed by the assessing officer on report of fingerprint expert without providing a reasonable opportunity to the assessee to submit his comments on the said report and without giving an opportunity to cross-examine the fingerprint expert is patently wrong. He relied upon the judgment of the Hon'ble Rajasthan High Court in 90 STC 519, judgment of the Hon'ble Supreme Court in [PRECEDENT], judgment of the Hon'ble Madras High Court in [PRECEDENT] and judgment of Hon'ble Supreme Court in [PRECEDENT] and judgment reported in [PRECEDENT]. Shri [ENTITY] submitted that no reliance can be placed on such report of the expert obtained behind the back of the assessee which was handed over to the assessee on the preceding evening of completing the assessment. No opportunity was allowed to the assessee to cross-examine the expert nor for giving his comments or report of another expert in rebuttal of Prof. [ENTITY]'s report. Without prejudice to this submission Shri [ENTITY] further submitted that what is the sanctity of such a report of the expert and what is the evidentiary value thereof? For this purpose, Shri [ENTITY] drew our attention to the following decisions :
(a) [PRECEDENT] This Judgment was cited before the learned Commissioner (Appeals) in para 1.16 of the written submissions. It has been held in the judgment that expert's opinion must always be received with great caution and it is unsafe to base a conviction solely on expert opinion without substantial corroboration.
(b) [PRECEDENT]. It was held by the Hon'ble Allahabad High court that report of the handwriting experts would not admissible in evidence in absence of formal proof and examining the experts. An expert's report cannot straight away be admitted without examining him and without asking him to cross-examine.
(c) The learned counsel also relied upon the judgment of the Madras High Court in [PRECEDENT] Shri [ENTITY] submitted that the expert's report without his cross-examination by the assessee has no evidentiary value whatsoever. The report of the expert should, therefore, be completely ignored and the addition based thereon should be deleted.
15. Shri [ENTITY] submitted that the rate of profits declared by the assessee is better as compared to the net profit declared in all past years. The assessee has declared net profit of 8 per cent which is in conformity with the net profit rate now incorporated by the legislature as a reasonable rate of net profit in [SECTION]. In the past also the agreements executed with various cement companies contained a case of maximum profit of 13 per cent as in the year under consideration. That does not mean that the assessee could derive net profit rate of 15 per cent. The assessee also produced in the paper book certain specimen bills such as copy of bill dated 1-5-1995 (copy at page 27 of PB which shows that they had charged commission for supply of labour at the rate of 10 per cent only. Out of this commission of 10 per cent, the assessee has to incur various expenditure: Therefore, the net profit rate of 8 per cent shown by the assessee is most reasonable and adequate. Shri [ENTITY] also drew our attention to the written submissions submitted before the Commissioner (Appeals) support the correctness and adequacy of the declared net profit.
16. Shri [ENTITY] further submitted that best judgment assessment has to be made in accordance with the provisions of law and in conformity with the decision of the Apex Court in various judgments, which have been referred to in the written submissions submitted before the Commissioner (Appeals). The arbitrary nature of the additions made by the assessing officer and the arbitrary nature of an ad hoc addition of Rs. 8 lakhs sustained by the Commissioner (Appeals) is proved by the fact that the total of wage payments made to seven persons whose thumb impressions were examined, according to the assessing officer, came to Rs. 3 lakhs, then how an addition of Rs. 8 lakhs can be justified. How the rate of 11.5 per cent can be treated as reasonable when the lower rate of net profit ranging between 4 per cent to 6 per cent was accepted in assessee's own case in the past in scrutiny assessments, Shri [ENTITY] thus strongly urged that the income declared by the assessee should be accepted. The entire disallowance made out of wage payments should be deleted.
16.1 We have carefully considered the submissions made by the learned representatives of the parties and have perused the orders of the learned Departmental authorities. We have also gone through the judgments relied upon by the learned counsel. We have also carefully gone through all other documents submitted in the compilation, to which our attention was drawn during the course of hearing.
17. It is an undisputed fact that the copy of report given by Prop. [ENTITY] was supplied to the assessee on 30-3-1999 at 5 p.m. and the assessment was completed on the very next day, i.e., on 31-3-1999. The report obtained by the assessing officer from Prof. [ENTITY] is dated 16-3-1999. It is beyond comprehension as to why the said report was not given to the assessee soon after it was received by the assessing officer so as to provide the assessee a reasonable opportunity to submit his report thereon and to submit another expert's report in rebuttal, thereof if considered proper or necessary. The report of Prof. [ENTITY] was handed over the assessee on 30-3-1999 at 5 p.m. This fact stated in the written submissions before the Commissioner (Appeals) has not been challenged or contradicted by the departmental authorities nor by the learned Departmental Representative before us. The assessing officer did not produce the said expert for cross-examination by the assessee. The reliance placed by the learned authorised representative on the report of the expert is clearly contrary to the specific provisions of [SECTION] and is also contrary to the principles of natural justice. In such a situation, the learned Commissioner (Appeals) should have either set aside the assessment order and he should have restored the matter back to the assessing officer, directing him to grant reasonable opportunity to the assessee to submit his comments on the experts report and, in case the assessee desires, the assessing officer should grant then an opportunity to cross-examine the expert. In the alternative the Commissioner (Appeals) who has very wide and plenary powers, could carry out such an exercise during the course of appellate proceedings before him. Without providing the assessee an opportunity to submit his defence or documents in rebuttal, of the report of the expert and without giving them opportunity to cross-examine the expert, no part of the disallowance should be sustained on the basis of such a report of the expert obtained by the assessing officer. It is well settled law that the principles of natural justice, particularly, the rule of audi alteram partem fully applies to assessment proceedings under the provisions of [ACT] as it vitally affects the civil rights of the taxpayer. Such principle of natural justice has been given a statutory recognition in [SECTION] of [ACT]. The disallowance made by the assessing officer and partly confirmed by the Commissioner (Appeals) is clearly erroneous as disallowance out of wage payments has been made in apparent violation of [SECTION] and the well known principles of natural justice.
18. However, we cannot accept the argument of the learned counsel appearing on behalf of the assessee that an addition made in violation of the principles & natural justice or [SECTION] should be cancelled. In such a situation, the orders of the Commissioner (Appeals) and assessing officer should be set aside and the matter should be restored back at the stage where from such an irregularity had occurred. In the present case, the assessing officer after providing a copy of the expert's report should have given adequate and reasonable opportunity to the assessee to submit his comments and whatever evidence the assessee considers proper in rebuttal of such a report. In case of assessee wants to cross-examine the expert, it is the duly of the assessing officer to produce the said expert for cross-examination by the assessee, as the assessing officer has obtained the report from the expert and placed reliance, thereon for making such a disallowance.
19. Ordinarily, the burden to prove the correctness of claim of the any deduction/expenses lies on the assessee. In the present case, the assessing officer by way of a sample/test check sent the wages payment register to the expert for getting his opinion. The expert has examined the various thumb impressions obtained by the assessee in the said wages payment register and gave opinion that thumb impressions of seven person/claimed to be respective thumb impression of seven persons, are, in fact, thumb impressions of one and the same person. The assessee has contended that this report does not establish that payments shown to have been made to those seven persons were not genuine, it could be a case where payment has been made to a co-labourer after the supervisor was satisfied about the reliability of the co-labourer. But the burden lies on the assessee to prove that those persons really existed and they really did render their services to the assessee. The assessee could produce those labourers before the assessing officer to prove that they had, in fact, received payment of wages for the period in question through other co-labourers to whom they had requested to collect the payment from the cashier/supervisor. The identity and existence of those labourers could also be proved by producing their respective documentary evidence relating to ESI, PF or other documents. required to be maintained as per various laws relating to welfare. If the assessee accepts that the thumb impressions of seven persons are of one and the same person, then the (sic-onus) win lie on the assessee to either produce those seven labourers or to produce clinching evidence before the assessing officer to show that they really rendered services and they really received wages payments, In case the assessee establishes the identity of the seven workers, and produces satisfactory evidence to prove that payments were really received by them, ordinarily the suspicion going on the mind of the. Learned assessing- authorities about the falsity or bogus nature of payment should come to an end. In such a situation the net rate of 8 per cent approximately declared by the assessee should be accepted as such. Net profit rate declared in the year under consideration is better as compared to net profit rate of 4.94 per cent in assessment year 1990-91 and net profit rate of 4.56 per cent in assessment year 1993-94, the assessments for which years were completed under [SECTION]. The net profit rate is also better as compared to the net profit rate declared by the assessee in all other past years ever since 1990-91 assessment year. Furthermore, the reasonableness of the net profit declared by the assessee at 8 per cent is also supported by the provisions of [SECTION], introduced from assessment year 1994-95 in case of contractors having contract receipts of not exceeding Rs. 40 lakhs which provides for application of NP of 8 per cent on contract receipts. If, however, the assessee fails to establish the identity or proof of existence of the workers in the relevant year, the assessing officer will be fully justified in making an estimated disallowance in a just and reasonable manner so as to compute the assessee's true and correct income for the year under consideration.
20. While estimating the disallowance, the assessing officer will be entitled to take into consideration the results of such a test check which has revealed the fact of payment shown,to have been made to seven workers what are not identifiable and whose existence in the relevant year also could not be proved by the assessee. In such a situation, the net profit rate of 8 per cent declared by the assessee will not disentitle the assessing officer further disallowance because then, it will be a clear case of showing payments to workers, who were not in existence at all. On the basis of a test check an estimated disallowance/addition can be validly made. The assessing officer should, however, make a fair, reasonable and honest estimate after taking into consideration all the facts and circumstances as may be submitted on behalf of the assessee before him in relation to estimation of the reasonable amount of net profit on declared contract receipts.
21. In view of the aforesaid facts and circumstances, the order of the Commissioner (Appeals) and the order of the assessing officer in relation to the aforesaid ground is set aside and the matter is restored back to the assessing officer for passing a fresh order in accordance with the provisions of law and after providing reasonable opportunity to the assessee. The assessing officer will also keep in mind the aforesaid observations while passing fresh order.
22. The other ground In assessee's appeal relates to confirmation of disallowance of 20 per cent of the expenses of staff welfare, conveyance, travelling, festival and telephone expenses aggregating to Rs. 4,42,900. Since the main point in issue has been restored back to the assessing officer, we consider it just and proper to set aside the order of the Commissioner (Appeals) and assessing officer on this point also and we direct the assessing officer to examine said heads and point out at least few specific instances of expenses of disallowable nature. The assessing officer has not given any reason in the order passed by him while making such disallowance. The learned Commissioner (Appeals) has also not discussed this ground in detail. It is, therefore, necessary to set aside the order of the Commissioner (Appeals) and assessing officer in respect of this ground also. The matter is accordingly restored back to the assessing officer who will decide the aforesaid point afresh in accordance with the provisions of law and after providing a reasonable opportunity to the assessee.
23. The issue relating to levy of interest under [SECTION] is consequential in nature. This matter is also, therefore, restored back to the assessing officer who will pass a speaking order for levy of interest under specific provisions while passing the fresh order.
24. In the result, both the appeals are treated as allowed for statistical purposes.