M/S Namitha Constructions,, Warangal vs Assessee

M/s Namitha Constructions, vs. Commissioner of Income-tax, Hyderabad. Vijayawada.

PAN - AADFN6118M (Appellant) (Respondent)

Assessee by : Shri G. Manikya Prasad Revenue by : Shri P. Somasekhar Reddy

Date of hearing 19-05-2015 Date of pronouncement 27-05-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the order dated 06/03/2014 passed by ld. CIT, Vijayawada u/s 263 of the Act, pertaining to AY 2009-10.

2. Briefly the facts are, assessee a partnership firm is engaged in the business of execution of civil contract works. For the AY under consideration, assessee filed its return of income on 30/09/09 declaring total income of Rs. 4,14,180. During the assessment proceeding, on verifying the books of account and other informations available on record, AO found that during the year assessee has undertaken work of supply of labour for civil, mechanical and man power supply to BGR Energy Systems, DC Industrial Services, Indure Pvt. Ld. and Macawber Beekay. Further, assessee has also obtained contract directly from KTPS and NTPS. AO also found that while 2 ITA No. 919 /Hyd/2014 M/s Namitha Constructions, Warangal

receipts from execution of work on sub-contract basis amounted to Rs. 1,88,19,898, receipts from work executed on main contract amounted to Rs. 9,22,470. Thus, the major portion of the contract works was executed by assessee is as a sub-contractor. While verifying the expenditure debited to P&L A/c, AO noticed that major expenditure incurred by assessee is towards labour charges, supply of metal and sand and fabrication work, however, almost all these expenses were incurred in cash and supported by self-made vouchers only. As the expenditures incurred were not totally verifiable, AO was of the view that books of account have to be rejected and income has to be estimated by applying a reasonable rate. On verifying the P&L A/c, AO noticed that assessee has shown net profit of Rs. 12,26,224 before deduction u/s 40(b) on gross contract receipts of Rs. 1,97,42,368, which works out to 6%. However, AO was of the view that the rate of profit in case of main contract business has to be adopted at 10% and that in case of sub-contract receipt has to be adopted at 7% and thereafter deduction u/s 40(b) of the Act is to be allowed. Assessee having agreed with the rate of profit proposed by AO, assessment was accordingly completed u/s 143(3) of the Act by determining the income at Rs. 6,11,775.

3. Ld. CIT in exercise of power u/s 263 of the Act called for assessment record of assessee for the impugned AY and after examining the same, was of the view that assessment order passed is erroneous and prejudicial to the interests of revenue due to the following reasons:

"1. The agreement copies of the assessee with various contracts, obtained by the AP, depicted that the assessee was entitled to certain percentage of payments on completion of certain level of work at certain stage. The assessee, claimed to have maintained bank accounts, submitted audit reports & claimed huge expenditure towards various heads, and had shown the opening & closing stock also. However, the AO has neither obtained the required material & examined them nor had any basis to come to a conclusion on the likely percentage of profit that is adopted by him.

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2. When the provisions of sect. 145(3) are invoked, although wrongly for the reason stated in para - (1) supra, if the AO had the ratio of the case of M/s KNR Constructions Ltd., Hyderabad in his mind, then the profit of the assessee should have been estimated @ 12.5% on main contracts and @ 8% on sub- contract works.

3. There were huge differences between the figures in the P&L account and the e-filed return. Further, the record did not indicate examination of any major expenses vis-a-vis projects for which the assessee filed agreement copies.

4. The bank statements also show huge number of withdrawals by way of self-cheques and the AO has not verified them with reference to the applicability of provisions of section 40A(3). Further, he has also not examined the adequacy of drawings, etc. of the partners' as is shown in their capital & current account."

Accordingly, he issued a notice to assessee to show cost as to why assessment order shall not be revised/set aside. In response to the notice issued by ld. CIT, assessee objected to the proceeding u/s 263 by stating that once assessment was completed by estimating the profit after rejecting the books of account, there is no reason for AO to either enquire into the individual expenses or make disallowance u/s 40A(3). Ld. CIT after considering the submissions of assessee, however, observed that while completing assessment, AO has estimated the profit at 10% on main contract and 7% on the sub- contracts without obtaining relevant material and examining them and also without adducing reasons for adopting the respective percentage of net profit. He further observed that, though, the statement of bank account indicate huge withdrawals by way of self-cheques, but, AO has not verified such transactions and found out whether the net profit percentage adopted by him is commensurate with such outcome. He also was of the view that AO has failed to make an enquiry with regard to the difference between P&L A/c submitted during the course of hearing and e-filed statement. Ld. CIT observed, AO has also not examined the sufficiency of the drawings accounted 4 ITA No. 919 /Hyd/2014 M/s Namitha Constructions, Warangal

by partners, therefore, estimation made by him has neither relevant materials nor the nexus or the basis. On the reasons stated above, ld. CIT holding the assessment order to be erroneous and prejudicial to the interests of revenue, set aside the same with the following observations:

"7. If we apply the above ratio and explanation to this case, it is clear that the order passed by the AO is erroneous in so far as it is a prejudicial to the interests of revenue for the purpose of section 263 of the Act as the AO has neither the material nor indicated the basis for the % of estimate made by him but also failed to make enquiry which on the facts and circumstances indicated in above was warranted in this case. Hence, the assessment order made by the AO u/s 143(3) of Act, dt. 13/05/2011 is set aside for redoing the assessment denovo on the lines indicated in para 5, supra and after giving the assessee a reasonable opportunity of being heard."

Being aggrieved, assessee is before us.

4. Ld. AR more or less reiterating the submissions made before ld. CIT at the time of revision proceeding, submitted that as AO having found the books of account unreliable has rejected the same and proceeded to estimate the profit, ld. CIT cannot hold the assessment order to be erroneous and prejudicial to the interests of revenue either on the allegation of insufficient enquiry or the rate of profit adopted by AO, as it will amount to substitution of opinion of ld. CIT as against the opinion of AO. In this context, he relied upon the following decisions:

1. M/s Sree Satya Sai Transport Vs. ITO, ITA No. 996/H/14, dtd. 08/04/15.

2. M/s Shanti Transport Vs. ITO, ITA No. 995/H/14, dt. 10/10/14

3. M/s GS Constructions Vs. ITO, ITA No. 253/H/13, dt. 14/03/13.

5. Ld. DR, on the other hand, relied upon the reasoning of ld. CIT.

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6. We have considered the submissions of the parties and perused the materials on record. We have also gone through the decisions relied upon by ld. AR. As can be seen, assessee is basically engaged in execution of civil contract works. It is also evident that major portion of contract executed by assessee is on sub-contract basis and it involves mainly supply of labour. The contract executed by assessee as a main contractor is almost negligible compared to contract executed as sub-contractor. It is also evident that major part of the expenditure, which is incurred in cash, claimed by assessee is on account of labour charges, supply of metal and sand and fabrication. It is also not disputed that these expenses were not supported by any authentic bills/vouchers, but, were only supported through self-made vouchers. Therefore, since the expenditure claimed is not verifiable, AO invoking the provisions of section 145(3) of the Act has rejected the books of account and estimated the income of assessee by applying the rate of 10% of the gross receipts on main contract and 7% on gross receipts from sub-contract. On a perusal of the order of ld. CIT, it appears, though he has raised a number of issues to hold the assessment order to be erroneous and prejudicial to the interests of revenue, but, the major issue on which ld. CIT has considered the assessment order to be erroneous and prejudicial to the interests of revenue appears to be the rate of profit adopted by AO, which according to ld. CIT, should have been 12.5% on main contract and 8% on sub-contract works. In our view, when AO is of the opinion that books of account are unreliable, the discretion is with him to reject the books of account and estimate the profit at a rate which is according to AO is reasonable considering the nature of business carried on by assessee. Once such decision is taken by AO, who is the best judge of the situation, then, ld. CIT cannot interfere with such decision of AO to substitute his own opinion on the rate of profit adopted by exercising power u/s 263 of the Act. Moreover, once the books of account are found to be unreliable and rejected resulting 6 ITA No. 919 /Hyd/2014 M/s Namitha Constructions, Warangal

in estimation of profit, AO is not required to enquire or examine the individual items of expenditures or other issues as pointed out by ld. CIT since estimation of profit usually takes care of such deficiencies in the books. In the aforesaid circumstances, ld. CIT cannot hold the assessment order to be either erroneous and prejudicial to the interests of revenue so as to revise the same u/s 263 of the Act. This view of our get support from the decisions relied upon by ld. AR. In the aforesaid facts and circumstances, we are of the view that exercise of power u/s 263 of the Act in the facts of the present case is not correct as assessment order cannot be held to be erroneous and prejudicial to the interests of revenue on the reasons stated by ld. CIT. Accordingly, we set aside the impugned order of ld. CIT and restore the assessment order.

7. In the result, appeal of assessee is allowed.

Pronounced in the open court on 27 th May, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 27 th May, 2015 kv

Copy to:-

1) M/s Namitha Constructions, C/o G.S. Madhava Rao & Co., CAs., Sudharma Buildings, M.G. Road, Warangal.

2) CIT, Vijayawada 3 ITO, Kothagudem

4) Addl. CIT, Khammam

5) The Departmental Representative, I.T.A.T., Hyderabad.