G.M. Engineers , Sikar vs Department Of Income Tax

Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM

vk;dj vihy la-@ITA No. 1082/JP/2011 fu/kZkj.k o"kZ@Assessment Year : 2008-09

The I.T.O. cuke M/s G.M. Engineers Ward 3, Sikar Vs. Janta Colony, Nawalgarh Road, Sikar. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AADFG 4050 D vihykFkhZ@Appellant izR;FkhZ@Respondent

jktLo dh vksj ls@ Revenue by : Mrs. Neena Jeph (JCIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri R.K. Bhalla (C.A.) & Shri Rajender S. Meel (C.A.)

lquokbZ dh rkjh[k@ Date of Hearing : 05/01/2015 ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 27/03/2015

vkns'k@ ORDER

PER: T.R. MEENA, A.M.

This is an appeal filed by the department against the order dated

16/09/2011 passed by the learned CIT(A)-III, Jaipur for A.Y. 2008-09.

The effective grounds of appeal are as under:-

"(i) the CIT(A) has passed a perverse order in restricting the trading addition of Rs. 34.39 lakh, simply, on the ground that the G.P. rate of 5.08% disclosed in the present year, was better than G.P. rate of 5.06, disclosed in the earlier year.

2 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

(ii) The CIT(A) has contradicted himself and passed a perverse order by upholding the contention of the assessee and yet making the ad hoc addition of Rs. 1 lac for "incriminating aspect and leakage of income,"

"due to shortcomings pointed out by the A.O."

(iii) The CIT(A) has passed perverse order in holding that the deficiencies pointed out by the A.O. were not sufficient to attract the provisions of Sec. 145(3).

(iv) The CIT(A) has erred in ignoring the fact that the factum/quantum of the expenses, such as on salaries were doubtful in light of the disclosed outstanding liabilities etc.

(v) The appellant craves leave to add, alter, amend, withdraw or interest any ground or grounds of appeal before or at the time of hearing of the appeal."

2. All the grounds of the revenue's appeal are revolving around

rejection of book result U/s 145(3) of the Income Tax Act, 1961

(hereinafter referred as the Act) and confirming the addition at Rs. 1 lac

only as against the addition made by the Assessing Officer at Rs.

34,39,982/-. The learned Assessing Officer observed that the assessee

firm is a civil contractor executing work order awarded by BSNL and

other telecom companies. The assessee had shown gross contract

receipt of Rs. 7,81,25,010/- on which gross profit at Rs. 1,45,93,601/-

and net profit of Rs. 39,70,558/- which given N.P. rate of 5.08%. The

assessee had paid interest of Rs. 1,85,299/- and remuneration to its

parent at Rs. 2 lacs. Thus, net profit before allowing these payments 3 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

was Rs. 43,55,857/-, it means N.P. rate was 5.57% on gross receipt. It

is observed that as per audit report, the assessee has not maintained

the vouchers for petty cash expenses. It is also found that the assessee

had not maintained stock register and stock was valued on estimate

basis. Expenses were only partly vouched, many of the expenditure

vouchers like those for rent, water charges etc. have no signature of

the recipient and are self prepared. The assessee gave the reasonable

opportunity of being heard and it was admitted by the A.R. that in this

case, provisions of Section 145(3) of the Act are squarely applicable.

Accordingly, he rejected the book result. The assessee was also asked

to explain the reasons for low rate of profit, which was replied by the

assessee vide letter dated 12/08/2010 and stated by the assessee that

the work has been carried out in slums and remote areas where cost of

material/loading and unloading transportation charges are higher. It is

further explained that the assessee's work was of different nature

requiring lot of digging and filling work. It is argued that purchase order

rates were same in earlier two years but expenditure had increased but

the submission was without any corroborative evidence. Similar many of

the expenses particularly the expenses under head other direct

expenses, water charges, fooding charges, office rent etc. are not 4 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

without proper vouchers but also unreasonably high and payment is

made mostly in cash. After considering above defects in the books of

account, the learned Assessing Officer estimated the N.P. rate @ 10%

and addition of Rs. 34,39,982/- was made by the Assessing Officer.

3. Being aggrieved by the order of the Assessing Officer, the

assessee carried the matter before the learned CIT(A), who had allowed

the appeal fully by observing as under:-

"2.3 I have carefully gone through the observations of the A.O. and relevant submissions of the learned A.R. were made during the assessment proceeding, especially in the light of the facts and circumstances of the issue under consideration. As can be seen, the controversy involved in the present case is only about the rejection of books of account and estimation of income u/s 145 of the Act. The assessment order reveals that the G.P. in the current year is shown better at 5.08%, on the substantial higher turnover of Rs. 7.81 crores, then the similar trends of the previous year, i.e. 5.06% on total sale of Rs. 2.62 crores only. In this regards, it felt that the reasons and grounds relied upon by the A.O. are only partially relevant and significant towards the credibility aspects of the books of account as such. But considering the above facts, they alone are not found sufficient to invoke the provisions of Sec. 145(3) of the Act. As also pointed out by the learned 5 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

AR that in the similar situation, the courts have held that simply not having proper stock register, lack of having proper expenses vouchers etc. alone cannot be made grounds for applying the provision of Sec. 145. In this regard, the onus is on the department to prove that accounts are really defective or incomplete to invoke such harsh measures. The above views are also echoed in the following decisions:-

1. Uttam Chuna Pathan Udhyog 20 TW 422 (Jaipur Bench)

2. Paradise Holidays 325 ITR 20 (Delhi).

In this regard, apart from the case laws relied upon by the learned A.R., even in other cases, including of M/s Gotton Line Khanij Udhyog (256 ITR 243) (Raj.) and Vinod Kumar Promad Kumar (66 TTJ 722) (Jodhpur Bench), it is held that the books of account cannot be rejected merely for want of stock register and if otherwise no other defects are pointed out in this regard. Similarly, if the trading result of the current year is higher than the previous year, no addition can be made, even if the books of account are rejected of u/s 145(3) of the Act.

It is also noteworthy that in the current year the appellant has shown better trading result then the previous year. This crucial aspect has been over looked by the A.O., while drawing the adverse view, i.r.o., reliability of the books of account. In my considered opinion, since the appellant has shown better result in the current year on higher T.O. 6 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

therefore, the other related minor shortcomings on the part of the appellant have became insignificant and redundant. Accordingly, the act of rejection of the books of account U/s 145(3) on the part of the A.O. is held as untenable and unwarranted, thus cancelled accordingly. Similarly, thought, the appellant has shown substantial higher profit ratio (i.e. 5.08%), then the previous year (5.06%), however, an ad hoc addition of Rs. 1,00,000/- is found essential to be sustained to take care of all the incriminating aspects and leakage of income, if any, due to the shortcomings pointed out by the A.O. related to the issue under consideration. Accordingly, the trading addition up to Rs. 1,00,000/- made u/s 145(3) is sustained and balance is deleted. Consequently, this ground of appeal is partly upheld."

4. Now the Revenue is in appeal before us. The learned D.R.

vehemently supported the order of the Assessing Officer and argued

that number of deficiencies were found in the books of account

including opening and closing stock. Payment through cash, self made

vouchers, which were verified by the Assessing Officer and detailed

findings have been given in the assessment order and these defects are

sufficient in case of civil contractor to reject the book result. Therefore,

the learned Assessing Officer was right in rejecting the book result U/s 7 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

145(3) of the Act and he also reasonable to estimate the income in case

of civil contractor.

5. At the outset, the learned A.R. for the assessee submitted that

the assessee was maintaining complete books of account, which was

duly audited U/s 44AB of the Act. All the transactions are fully vouched

by bills/vouchers/documents. Nature of work of the assessee is such

that complete pucca bill/outside vouchers are neither possible nor

practicable. However, such expenditure is supported by the internal

vouchers containing details of expenditure and signature of recipients.

The main reason for outstanding salary is that assessee did not receive

the payment from the companies on time. It received payment from

companies at the fag end of the year and part amount in April 2008 to

June 2008 after the close of the year. On receipt, the amount was

withdrawn in cash and payments to the creditors were made. The main

reason for making the payment in cash is that these persons are

illiterate and do not have any bank account. In fact in such type of

contract, generally payment to the creditors is made on receipt of

payment from the companies for whom work is done. In these facts

simply because the part amount is outstanding, it does not mean that

actual profit is suppressed. The Assessing Officer has not pointed out 8 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

any specific payment, which is not verifiable or which is bogus. Hence

huge trading addition made by the Assessing Officer is uncalled for and

be deleted. He further argued that the position of G.P. rate and N.P.

rate as per audited books of account of the assessee during the

previous year under consideration and in last year to that is tabulated

as under:-

F.Y. A.Y. Turnover Gross Profit G.P. rate Net Profit N.P. rate 2006-07 2007-08 2,62,84,448/- 24,10,567/- 9.17% 6,37,917/- 2.43% 2007-08 2008-09 7,81,25,010/- 1,45,93,602/- 18.68% 39,70,558/- 5.08%

From the above table, it can be noted that the net profit rate decalred

by the assessee is better than the immediately preceding year. The net

profit has been increased from Rs. 6,37,917/- to Rs. 39,70,558/-. Gross

receipt has also been increased from 2.62 crores to Rs. 7.81 crores. The

various courts have held that if the assessee has declared better G.P.

compared to preceding year, no addition can be made. The case laws

referred by the A.R. are as under:-

1. ITO Vs. M/s Bhagirath Kaswan Contractor (ITA No. 404/Jodh/2013).

2. Addl.CIT Vs. Lakhani Shoes Limited 34 Tax Worls 32 (JP) (ITA No. 173/JP/2000).

3. J.C. Sharma Vs. ITO 33 Tax World 80 (JP) (ITA No. 258/JP/1996).

9 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

4. Brij Bhushan Lal Praduman Kumar Vs. CIT (1978) 115 ITR 524 (SC).

5. CIT Vs. Popular Electric Co. (P) Ltd. (1993) 203 ITR 630 (Cal.).

6. Ashok Kumar & Co. Vs. ITO (2004) 2 SOT 518 (Asr.)

The learned Assessing Officer had not pointed out any specific defect or

discrepancy in the books of account maintained by the assessee, which

is question of fact. The learned CIT(A) had found that the account

maintained by the respondent were neither defective nor incomplete.

Even the Assessing Officer has not any fault as such with the system of

accounting being followed by the assessee. He further relied on the

following case laws:-

1. J.C. Sharma Vs. ITO 33 Tax World 80 (JP) (ITA No. 183/JP/2000).

2. ITO Vs. M/s Bhagirath Kaswan Contractor (ITA No. 404/Jodh/2013).

Therefore, learned A.R. prayed to uphold the order of the learned

CIT(A).

6. We have heard the rival contentions of both the parties and

perused the material on record. The assessee is a civil contractor. As

per auditor's note on account, the assessee has not maintained the 10 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

vouchers for petty cash expenses. The assessee has not maintained

closing stock properly but maintained on estimate basis. The expenses

were partly vouched on which no signature of recipient has been made.

Particularly, the expenses for rent, water charges and claimed on self

made vouchers. The A.R. himself admitted before the Assessing Officer

that Section 145(3) are squarely applicable in the case of assessee. The

assessee has shown current outstanding liability as on 31/3/2008 at Rs.

70,83,850/-, which was more than 30% of expenditure under the head

of salary and wages and also pending for more than three months,

which is not possible in contractor line. The assessee's claimed that, it

did not receive the amount from the BSNL, therefore, wages were

outstanding, which was received later on but the assessee has not

submitted any evidence regarding the payment from the BSNL later on

except written reply and also further subsequent withdrawal from the

bank account and reimbursement of the salary and wages in cash.

Therefore, learned CIT(A) was not right in holding that defects pointed

out by the Assessing Officer cannot be ground of rejection of books of

account U/s 145(3) of the Act. There is no justification by the learned

CIT(A in confirming the addition of Rs. 1 lac without confirming the

rejection of book result U/s 145(3) of the Act. The defects pointed out 11 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

by the Assessing Officer are sufficient to reject the book result.

However, we find that the learned Assessing Officer had estimated the

income higher side and had not compared the past history of the case

and also had not made any comparison with another case of similar line

of business. Therefore, we confirm the addition @ 6% net profit subject

to interest and remuneration to the partners. The Assessing Officer is

directed to recalculate the income as per above findings given by the

Bench.

7. In the result, the revenue's appeal is partly allowed.

Order pronounced in the open court on 27/03/2015.

Sd/- Sd/- ¼vkj-ih-rksykuh½ ¼Vh-vkj-ehuk½ (R.P.Tolani) (T.R. Meena) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated 27th March, 2015

*Ranjan

vkns'k dh izfrfyfi vxzsf'kr@Copy of the Order forwarded to:

1. vihykFkhZ@The Appellant- The I.T.O., Ward 3, Sikar.

2. izR;FkhZ@ The Respondent- M/s G.M. Engineers, Sikar.

12 ITA 1082/JP/2011_ ITO Vs M/s GM Engineers

3. vk;dj vk;qDr@ CIT

4. vk;dj vk;qDr@ vk;dj vk;qDr¼vihy½@The CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur

6. xkMZ QkbZy@ Guard File (ITA No. 1082/JP/2011).

vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar