V.V. Constructions,, Pune vs Assessee

These are cross appeals. The first one is filed by the assessee

and the second one filed by the Revenue and are directed against

the order dated 24-06-2013 of the CIT(A)-V, Pune relating to

Assessment Year 2009-10. For the sake of convenience, these were

heard together and are being disposed of by this common order. 2

2. Facts of the case, in brief, are that the assessee is a

partnership firm engaged in the business of Civil Construction. It

filed its return of income on 19-09-2009 declaring total income of

Rs.41,21,819/-. During the course of assessment proceedings the

Assessing Officer noted that assessee firm has shown net profit of

Rs.47,21,819/- on a total turnover of Rs.8,68,76,534/- which comes

to 5.48%. He noted that in the immediately preceding assessment

year the assessee has shown net profit of Rs.53,32,302/- on a total

turnover of Rs.6,52,17,258/- which comes to 8.18%. Thus, the

profit percentage has fallen down by 2.7% of the total turnover as

compared to the preceding assessment year. He observed that there

was no claim of recession in that period considering overall market

situation and most of the contractors had shown better book results

in comparison to previous year.

3. On being asked by the Assessing Officer it was claimed that

the fall in profit was due to increase in labour, material and

overhead cost. The assessee firm also submitted the comparative

details of gross profit/operational profit for the preceding year as

well as current year. From the various details furnished by the

assessee the Assessing Officer noted that there is substantial

increase in Diesel, Petrol, Salary and Bonus, Wages and

Transportation charges. From the various bills and vouchers

produced before the Assessing Officer he noted that in the wages

register only name of the workers are mentioned. Their complete

address and nature of work carried out by them or details of work

completed by them are not mentioned. Further, most of the

signatures placed on register were in English which according to the

AO seems to be doubtful. Further, no independent verification can

be made in the available circumstances. Therefore, he was of the 3

opinion that the wages claimed at Rs.1,83,01,225/- as against

Rs.1,30,66,346/- in the preceding year cannot be justified.

Similarly, from verification of the transport bills, he noted that the

bills do not show Telephone No., Registration No., detailed

addresses etc. The transport bills do not show the mode of Vehicle,

Vehicle No. etc. Therefore, he was of the opinion that independent

verification cannot be made. Further, the transport bill does not

support voucher of Hamali expenses. He therefore was of the

opinion that the transport charges amounting to Rs.6,73,606/-

during the impugned assessment year as against Rs.2,92,377/- in

the preceding assessment year seems very excessive. The Assessing

Officer similarly noted on verification of sub contract bills that most

of the bills show similar entries like Cement, Concrete for Canal site,

laying chip masonary etc. Further, some of the bills raised were

handwritten and do not contain detailed addresses, telephone nos.

etc. Further, one bill was tampered since as against the date 28-02-

2009 it was hand written earlier as 28-02-2008. Further, certain

bills were computerised print outs and do not contain detailed

addresses, contact number, registration number etc. On being

questioned by the Assessing Officer, it was clarified that in this line

of business the persons involved therein are from remote villages

and are mostly uneducated. However, the AO was not satisfied with

the explanation given by the assessee and observed that possibility

of inflation of expenses cannot be ruled out especially when most of

the payments were made in cash. In view of the above, the

Assessing Officer was of the opinion that the book result shown by

the assessee is not reliable and not verifiable. He therefore invoked

the provisions of section 145(3) and rejected the book results. The

Assessing Officer thereafter analysed the profit shown by the

assessee during the current year as well as in the preceding 4

assessment year. Rejecting the various explanations given by the

assessee and observing that the assessee firm failed to justify the

fall in GP from 19.26% in the preceding year to 13.60% in the

impugned assessment year, the Assessing Officer adopted 20% GP

holding the same to be most reasonable. Since the assessee has

already offered GP rate of 13.60% during the year under

consideration the balance 6.4% on turnover of which comes to

Rs.55,08,898/- was treated by him as suppressed profit of the

impugned assessment year. He accordingly made addition of

Rs.55,08,898/- to the total income of the assessee.

4. Before CIT(A) the assessee strongly objected to the rejection of

book results as well as adoption of GP rate of 20%. Based on the

arguments advanced by the assessee the Ld.CIT(A) held that merely

because the wage register is signed by some labourers in English

the authenticity of the same cannot be doubted. However, he

observed that the transport bills do not contain the Registration No.

of vehicles as well as detailed addresses and contact numbers of

suppliers. Further, some of the bills are not even signed or

stamped, therefore, the bills and vouchers of the assessee firm

cannot be relied upon fully. He, therefore, upheld the action of the

Assessing Officer in rejecting the book results.

5. So far as the adoption of GP profit @20% adopted by the

Assessing Officer as against 13.60% by the assessee is concerned he

observed that the assessee was not able to explain the fall in GP rate

from 19.26% to 13.60%. He observed that there is some truth in the

explanation of the assessee that due to increase in certain overhead

expenses as well as royalty payment there was decline in profit.

However, the assessee could explain only to the extent of

Rs.33,43,403/- towards fall in gross profit due to such higher 5

royalty payment and increased overhead expenses. Thus, the

difference of Rs.21,65,495/- still remains unexplained. Therefore,

he was of the opinion that if net profit is adopted at 8% then the net

profit will be Rs.69,50,123/- as against net profit of Rs.47,21,819/-

leaving the difference of Rs.22,28,304/-. However, considering the

fact that certain percentage has been retained by M/s. Right

Construction from whom the assessee has received some contract

work, he held that a lumpsum addition of Rs.20 lakhs will meet the

ends of justice. He accordingly directed the AO to restrict the

addition of Rs.20 lakhs.

6. Aggrieved with such part relief given by the CIT(A) the

Assessee as well as the Revenue are in appeal before us with the

following grounds :

Grounds by Assessee :

"1) On the facts and in the circumstances of the case, Learned CIT (Appeals) erred in confirming the action of Assessing Officer in rejecting the books of accounts of the Assessee.

2) On the facts and in the circumstances of the case, Learned CIT (Appeals) erred in confirming the action of Assessing Officer in estimating the gross profit instead of relying on the audited accounts of the assessee.

3) On the facts and in the circumstances of the case, Learned CIT (Appeals) erred in maintaining the addition of Rs.20 lacs made by the assessing officer by estimating the gross profit of the assessee.

4) Any other grounds of Appeal that may be raised at the time of hearing of the appeal."

Grounds by Revenue :

"1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in restricting the addition made by the A.O. on account of fall in gross profit when several discrepancies were noticed by the A.O. leading to rejection of book results for which no satisfactory explanation is seen to have been offered by the assessee?

2. Whether on the facts and in the circumstances of the case and in law the CIT(A) was justified in restricting the addition made by the AO on account of fall in gross profit by rejecting the books of accounts, when 6

the CIT(A) himself has upheld the decision of the AO in rejecting the books of accounts.

3. Whether on the facts and in the circumstances of the case and in law the CIT(A) was justified in restricting the addition made by the AO on account of fall in gross profit when the assessee could not prove the allocation of cost among sub-let, sub contract and other contracts alongwith supporting purchases and expenses bills for such work.

4. The appellant craves leave to add, amend or alter any of the above grounds of appeal"

7. The Ld. Counsel for the assessee strongly challenged the order

of the CIT(A) sustaining addition of Rs.20,00,000/-. He submitted

that as against sub contract work of 26% of the total contract

receipt in the preceding assessment year the sub contract receipt

during the current assessment year is 54% of the total contract

receipts. He submitted that the AO rejected the books of account on

3 grounds, i.e. (1) the wage register do not give the complete address

of the labourers and some of the signatures are in English, (2) the

transport expenses do not give the mode of transport and vehicle

number etc., and (3) the payment to sub contractors are not fully

verifiable due to incomplete address and most of the payments are

made by cash.

8. So far as the signature of the labourers in English is

concerned he submitted that the same cannot be a ground for

rejection of the book results. Now-a-days even highly educated

persons are doing labour work, therefore, merely because some of

the labourers have signed in English the same cannot be a ground

to disbelieve the wage register. So far as the transportation expenses

are concerned the Ld. Counsel for the assessee drew the attention of

the Bench to pages 76 to 82 of the paper book and submitted that

out of the transportation charges of Rs.6,72,606/- the major

amount is paid to Shri Khilari Balasaheb K. He submitted that his

PAN number was given and TDS of Rs.13,604/- was deducted from 7

the bill amount. His complete address was also given. Referring to

the bills issued by him he submitted that since Shri Khilari

Balasaheb has issued the bills giving full details, PAN Number and

TDS has been made, therefore, the AO should not have disbelieved

the transportation charges. He submitted that the other

transportation charges are hardly about Rs.13,000/- paid to 4

persons. Therefore, in absence of any adverse material before the

AO, the AO should not have rejected the book results on account of

transportation charges.

9. Explaining the payments made to the sub contractors, the Ld.

Counsel for the assessee submitted that the assessee has made

payment of Rs.1,12,24,253/- to 17 sub contractors. In all the cases

the assessee has provided the PAN Numbers of the sub contractors

and TDS has been made. The assessee has given the detailed

addresses of the sub contractors, the list of which is placed at pages

83 & 84 of the paper book. As regards the allegation of the AO that

there is overwriting in one bill, the Ld. Counsel for the assessee

drew the attention of the Bench to page 93 of the paper book where

the date was overwritten, i.e. as against 28-02-2009 it was earlier

written as 28-02-2008. He submitted that mistake can happen by

anybody and since it was a hand written bill merely because there is

some overwriting the book results cannot be rejected on this trivial

defect.

10. Referring to page 102 of the paper book the Ld. Counsel for

the assessee drew the attention of the Bench to the profit and loss

account and submitted that as against the material consumption at

28.89% in the preceding year such consumption has gone upto

36.79% during the current year. Similarly, as against royalty

charge of Rs.3,67,898/- in the preceding year, the same has gone 8

upto Rs.23,23,403/- during the current year. He submitted that

royalty payment is paid to the Government and there is no scope of

any pilferage. He submitted that as against 16.96% profit from own

contract work the assessee has earned 10.3% in case of sub

contract work and 12.18% on other contract work. Therefore, when

the assessee receives the contract amount from the principal

contractor as a sub contractor profit percentage cannot be higher

like that of a contractor.

11. Referring to the assessment order for A.Y. 2006-07 he

submitted that in that year the assessee had not given the list of

sundry debtors, sundry creditors and work in progress for which the

book results were rejected. However, for the current year there is no

such defect. The assessee has fully explained all the details.

Referring to the copy of the assessment order for A.Y. 2012-13 he

submitted that the AO has accepted the book results and has not

gone for any estimation. Referring to the decision of Hon'ble Punjab

& Haryana High Court in the case of CIT Vs. Om Overseas reported

in 315 ITR 185 he submitted that in absence of specific defect in the

books of account the lower profit cannot be a ground for rejecting

the book results. Referring to the decision of the Hon'ble Bombay

High Court in the case of R.B. Jessaram Fatechand (Sugar

Department) Vs. CIT reported in 75 ITR 33 he submitted that the

Hon'ble High Court in the said decision has held that books of

accounts cannot be rejected and profit estimated merely on the

ground that address of the assessees are not mentioned in the case

of cash transactions. He accordingly submitted that the CIT(A) was

not justified in upholding the rejection of books of account and

sustaining addition of Rs.20,00,000/-.

9

12. The Ld. Departmental Representative on the other hand

heavily relied on the order of the AO. He submitted that the AO had

categorically given a finding that the book results are not reliable

due to defects in wage register, transportation expenses and the

defects in the bills raised by the sub contractors and overwriting in

some of the bills. Therefore, the CIT(A) was not justified in

sustaining only an amount of Rs.20,00,000/- as against

Rs.55,08,898/- added by the AO.

13. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and the CIT(A) and

the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. We find the

assessee in the instant case is engaged in the business of Civil

Construction. It has received contracts from Government

Departments as well as from private parties as sub contractor. The

gross profit declared by the assessee during the impugned

assessment year is about 13.6% as against 19.34% GP in the

preceding assessment year. We find the Assessing Officer during

the course of assessment proceedings examined the books of

account and noted that the wage register does not contain the

complete address of the labourer nor the nature of work carried out

by the labourers. Further, some of the signatures are in English.

He, therefore, was of the opinion that the claim made on account of

wages is not justified. Similarly, he also observed that some of the

transport bills do not contain the mode of transport and the vehicle

numbers etc. Further, the payments made to the sub contractors

are made in cash and the bills issued by them do not give complete

address and contact numbers and registration no. etc. Further,

there was overwriting of date in one bill. In view of the above and 10

considering the fact that the GP for the impugned assessment year

is less than the preceding assessment year, he rejected the book

results and adopted 20% GP.

14. We find the Ld.CIT(A) while upholding the rejection of books of

accounts, however, sustained addition of Rs.20,00,000/- as against

addition of Rs.55,08,898/- made by the Assessing Officer. From the

various details furnished by the assessee, we find from page 76 of

the paper book that the assessee has incurred transportation

charges of Rs.6,73,606/- out of which an amount of Rs.6,60,396/-

has been paid to one Mr. Khilari Balasaheb K. whose PAN number is

given and TDS has been made from the transportation charges. The

balance amount is paid to 4 persons totalling to Rs.13,210/-.

Further, complete address of all the 5 transports are given.

Therefore, under these circumstances, we are of the considered

opinion that the Assessing Officer should not have disbelieved the

transportation charges. Similarly, the other ground on which the

AO rejected the books of account is that some of the signatures are

in English in the wage register and that is an incomplete wage

register since the work done by the labourers are not mentioned.

We find the Ld.CIT(A) has already rejected the contention of the AO

regarding signature in English and the Revenue is not in appeal.

Further, wages register usually do not give the nature of work done.

Address of the labourers in some registers are optional. This in our

opinion cannot be a ground for rejecting the book results.

15. So far as the payment to the sub contractors are concerned

we find from pages 83 and 84 of the paper book that the assessee

has given complete address of the 17 labour contractors giving their

name, address, etc. The assessee has given PAN Numbers in all

cases and TDS has been deducted from such payments. Under 11

these circumstances we do not find any justification for rejecting the

book results. So far as the other observation of the Assessing Officer

that in one of the bill there is some overwriting the same in our

opinion is too silly and cannot be a ground for rejecting the entire

book result.

16. From the comparison of the profit and loss account for A.Y.

2008-09 and A.Y. 2009-10, we find the material consumption was

36.79% during the current year as against 28.89% in the preceding

year. Similarly, as against Rs.3,67,898/- incurred towards royalty

charges in the preceding assessment year the assessee has incurred

Rs.23,43,403/- towards royalty charge during the impugned

assessment year. The royalty charges has been paid to Government,

thus, there is almost an increase of about Rs.20 lakhs in the royalty

payment. Further, we find merit in the submission of the Ld.

Counsel for the assessee that the profit from sub-contract work will

be less since the main contractor retains a part of the profit.

Therefore, as against 17.96% profit from own contract work, the

assessee has earned 10.38% from sub contract work and therefore

profit from sub contract work cannot be at par with profit from

contract work.

17. The Hon'ble Bombay High Court in the case of R.B. Jessaram

Fatechand (Supra) has held that in the case of cash transaction

where delivery of goods is taken against payment, it is hardly

necessary for the seller to bother about the name and address of the

purchaser. The account books of an assessee cannot therefore be

rejected merely on the ground that the particulars of the assessee

are not mentioned in the case of cash transactions. The Hon'ble

Punjab & Haryana High Court in the case of Om Overseas (Supra)

has held that in absence of any specific defects pointed out in the 12

books of account, the book results cannot be rejected merely on the

ground that there is fall in profit ratio.

18. Since in the instant case, we have already held that the

defects as pointed out by the Assessing Officer are trivial in nature

which do not call for rejection of the book results, therefore,

consideration the totality of the facts of the case and in view of our

discussion in the foregoing paragraphs, we are of the considered

opinion that the rejection of books of account in the instant case is

not justified. We therefore hold that the income returned by the

assessee has to be accepted. The grounds raised by the assessee

are accordingly allowed. Consequently the grounds raised by the

Revenue are dismissed.

19. In the result, the appeal filed by the Revenue is dismissed and

the appeal filed by the assessee is allowed.

Pronounced in the open court on 12-06-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 12th June, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-V, Pune 4. CIT-V, Pune 5. The D.R, "B" Pune Bench 6. Guard File By order

// True Copy // Senior Private Secretary ITAT, Pune Benches, Pune