Income Tax Appellate Tribunal - Jaipur
Harbans Lal Sethi, Jaipur vs Addl. Cit, Kota on 30 May, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL,
JAIPUR BENCHES , JAIPUR
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BEFORE: SHRI BHAGCHAND, AM & SHRI KUL BHARAT, JM
vk;dj vihy la-@ITA No. 495, 496 & 497/JP/2013
fu/kZkj.k o"kZ@Assessment Year : 2006-07, 2007-08 & 2008-09
Shri Harbans Lal Sethi cuke The Addl. CIT
97, Dushera Scheme, Kota Vs. Range-1, Kota
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AJYPS 6625 G
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 2/JP/2014 & 823/JP/2014
fu/kZkj.k o"kZ@Assessment Year : 2008-09 & 2010-11
The ACIT cuke Shri Harbans Lal Sethi
Circle- 1, Kota Vs. 97, Dushera Scheme, Kota
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AJYPS 6625 G
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@Assessee by: Shri Mahendra Gargieya, Advocate
jktLo dh vksj ls@ Revenue by: Shri R.A. Verma, Addl. CIT-. DR
lquokbZ dh rkjh[k@ Date of Hearing : 27/04/2017
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 30/05/2017
vkns'k@ ORDER
PER BHAGCHAND, AM
The assessee has filed the appeals against the separate orders of the ld. CIT(A), Kota all dated 26-03-2013 for the assessment years 206-07, 2007-08 and 2008-09 while the Revenue has filed the appeals against 2 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
separate the orders of the ld. CIT(A), Kota dated 29-10-2013 and 22- 09-2014 for the 2009-10 and 2010-11 respectively. For the sake of convenience and brevity of the case, these appeals are being disposed off through a common order.
2.1 The ground of appeal raised by the assessee in ITA No. 495/JP/2013 for the assessment year 2006-07 is as under:-
''1. The impugned additions and disallowances made in the order u/s 143(3) dated 21.11.2008 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.
2.1 Rs.14,00,000/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the application of Sec.145(3) of the Act. The provision so invoked and confirmed by the CIT(A) being contrary to the provisions of law and facts, the same may kindly be quashed. Consequently the trading addition of Rs.14,00,000/- may kindly be deleted in full.
Alternatively and without prejudice to above 2.2 The ld. CIT(A) further erred in law as well as on the facts of the case in confirming the addition of Rs.12,15,176/- made by the AO (by applying NP @ 11.50%) and further erred in enhancing the addition to Rs.1,84,824/-. The addition so made & confirmed and further enhanced by the CIT(A) is totally contrary to the provisions of law and facts on the record and hence the addition may kindly be deleted in full.
2.3 The ld. CIT(A) further erred in law as well as on the facts of the case in enhancing the income which is without jurisdiction being totally contrary to the provisions of law and facts on the record and hence the enhancement kindly be deleted in full.
3. Rs.1,24,830/-: The Id. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of the following expenses:
S.No. Head of Expenses Exp. 20% Disallowed Exp. sustained claimed by AO by CIT(A) 3.1 Depreciation on Vehicles Rs.6,13,118/- Rs.1,22,623/- Rs.1,22,623/-3 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
3.2 Depreciation on Mobiles Rs.11,038/- Rs.2,207/- Rs.2,207/-
TOTAL Rs.1,24,830/- Rs.1,24,830/-
The disallowance so made and confirmed by the CIT(A) being totally contrary to the provisions of law and facts of the case, kindly be deleted in full.
4. The AO & ld. CIT(A) further erred in law as well as on the facts of the case in charging interest u/s 234B & 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full."
3.1 During the course of hearing, the ld. AR of the assessee has not pressed the Ground No. 1. Hence, the same is dismissed being not pressed.
4.1 Apropos Ground No. 2 ( 2.1, 2.2 and 2.3) of the assessee, brief facts of the case are that assessee is engaged in civil contractor business mainly in constructing of canals for irrigation purpose. During the period the assessee executed contract at different sites. The return of income was filed on 31.10.2006 declaring total income of Rs.1,69,36,640/-. During the year under consideration, the assessee had shown gross contract receipts at Rs. 24,27,14,639/- as against gross contract receipts shown of Rs.23,62,72,053/-last year and Net Profit 2,66.97,007/- giving NP rate of 11.00% (before Interest & depreciation) as against N.P. shown 4 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
at Rs.1,89,85,180/-giving NP rate of 8.04% (before Interest & depreciation) last year. It is noted that the AO rejected the books of account of the assessee by applying the provisions Sec.145(3) of the Act and enhanced the GP rate @ 11.50% (subject to Interest & depreciation). Thus, the AO made addition of Rs.12,15,176/- to the declared income. The relevant observation of the AO is as under:-
''The contract business of assessee is mainly in respect of constructon of canal and in such contract rate of profit is generally higher as compared to other civil works. Moreover, the assessee is deploying heavy capital assets by way of machinery in his business which is proved from the substantial depreciation claim made by the assessee. Due to such capital investment, the profit rate should also be higher. Considering all the facts and circumstances mentioned above, and also considering the nature of business and work executed by the assessee, the net profit rate is reasonable and applied 11.5% on total gross receipt subject to interest and depreciation. Accordingly, trading addition of Rs. 12,15,176/- is made as per details below:
Profit on receipt of Rs. 24,27,14,639/- Rs. 2,79,12,183/- Profit declared by the assessee Rs. 2,66,97,007/-
As discussed in para 3
trading addition Rs. 12,15,176/-''
4.2 Being aggrieved, the assessee went in first appeal before the ld.
CIT(A) who upheld the application of Sec. 145(3) and also issued a Show Cause Notice proposing enhancement. In response to Show Cause Notice assessee filed detailed written submissions time to time. The findings of the ld. CIT(A), are as under:-
"I have gone through AO's findings and assessee's submissions.5 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
In fact the reply of assessee goes against him, the assessee submitted that civil work continuous on a regular basis and generally payment is received after 2-3 months, if we take this into account then the work done in say August, 2005 would not result into sale and the (-) negative figure of closing stock would go up.
Considering the faults pointed out by the A.O. and the above discussion, I am of the firm opinion that the assessee was showing lesser profit that what it was earning and this resulted in accumulation of closing stock, which was suppressed by the assessee.
When we compute closing stock (rationally), it would be seen that closing stock should not be less than 5 to 10% of the work done in any year as the works were going on continuously.
Therefore, in my opinion, addition of at least Rs. 12.00 lakhs was required to be made only on the ground of suppression of closing stock. There were many other defects pointed out by the A.O., which could also result in further addition.
Therefore considering the overall facts of the case, the A.O. is directed to make addition of Rs. 14.00 lakhs, this would result in enhancement of Rs.1,84,824/-."
Conclusively, the ld. CIT(A) enhanced the addition made by the AO by Rs.1,84,824/- which resulted into total addition of Rs.14 Lakhs which in terms of NP rate (subject to interest & depreciation) comes to 11.58%. 4.3 Being aggrieved by the order of the ld. CIT(A), the assessee is before us who has challenged the application of Sec.145(3) of the Act and also confirmation of addition of Rs.12,15,176/- made by the AO and the enhancement made therein of Rs.1,84,824/- by the ld. CIT(A). It may be noted that at the time of the hearing of the appeal, the ld. AR of the assessee did not press the applicability of Sec.145(3) and hence, part of the ground no.2 is hereby dismissed.
6 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
4.4 During the course of the hearing, the ld. AR filed detailed written submissions along with comparative charts which are being reproduced as under:-
"1.1 Settled Past History: The appellant is a civil contractor and the past history in this case is settled since long up to the stage of this Hon'ble ITAT, in the sense that though appellant claimed to have maintained complete books of account and other records yet however, all along the AO himself has rejected the books of account and invoked Sec.145(3) alleging defects and deficiencies in the same which, have also been upheld by the CIT(A) and when carried to the appeals by the Hon'ble ITAT in ITA No.586/JP/07 & 685/JP/207 for A.Y. 2003-04 & 2004-05 (PB 37-47). Kindly refer paper book page 39 at para 5 which is reproduced hereunder:
"xxx..............Therefore, in the circumstance and facts of the case we find no infirmity in the order of the ld. CIT(A) who has rightly invoked the provisions of section 145(3) of the Act."
Similar view was taken in ITA No. 60/JP/08 & 17/JP/08 for A.Y. 2003-04 & 2004-05 at paper book page 44.
Continuing the same line and consistency, the AO this year also asked the assessee to produce the books of account examined the same and after noticing various deficiencies and defects (AO Pg 2-5) invoked Sec.145(3) (AO Pg-5) against which, the assessee took specific GOA No.1 before the CIT (A) challenging the very invocation of Sec.145(3).
1.2 It is submitted that vide GOA 2 before the ld. CIT(A), the assessee challenged the additions made by the AO on merits. The ld. CIT(A) after reproducing the entire assessment order in its operative part, took the matter in altogether a different direction and ultimately confirmed the addition made by the AO in the sense that he made an enhancement hence, the original addition made by the AO, having been included within that itself, was also confirmed.
A reading of the ld. CIT(A) order pg 10 to 13 will show that the ld. CIT(A) has adopted an altogether different approach which is highly contradictory in itself. From the facts which he himself has summarized at pg-13 of his order, his approach appears to be that the figures of closing stock available with the assessee at various sites on monthly basis is taken and on reconciliation with the closing stock shown/recorded in the regularly maintained books of account, shows that there was a shortage of the closing stock on monthly basis, which was accumulated to Rs.12 Lacs at the end of the year and this shortage was nothing but a part of the profit which was 7 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
not disclosed by the assesseee. Therefore, in his view, not only the higher revision of income made by the AO i.e. the trading addition made by him, was required to be confirmed but there was further scope of enhancing the income so assessed. For AY 2007-08 he alleged that the expenses (relating to sub-contractors) were inflated hence there was undisclosed profit remained with the assessee as undisclosed closing stock which was reflected as negative closing stock. Accordingly, he completely ignored the past settled history of the case as regard the rejection and also w.r.t. the application of NP rate and even ignored the decisions of this Hon'ble ITAT Bench relying / falling back on the same set of accounts in the preceding various years i.e. from AY.2003-04 & 2004-05 and even in A.Y. 2005-06.
2. It is submitted that the computation of the income under the head "Profits and gains of Business or profession", can be made in two ways only. Firstly, where the assessee claims to have maintained books of accounts in regular course and in that situation Sec.145 makes it binding on the A.O. to compute the income in its accord only. Secondly, where he is not satisfied about the completeness or correctness of the accounts or the method of accounting employed or the accounting standard notified have not been regularly followed in that situation u/s 145(3), he may make an assessment in the manner provided u/s 144. Thus, the law has not visualized a situation where the Revenue on one hand do not accept the results declared in the accounts by rejecting the same but also wants to make an enhancement in the declared income. In the instant case, the A.O. has certainly adhered to the settled principle that once he rejected the account u/s 145(3), then has tried to make an assessment in the manner provided u/s 144 (though his estimation is separately under challenge). However, the ld. CIT(A) has adopted this strange theory where he has adopted a path which even the law has not visualized/provided for. The ld. CIT(A) having confirmed A.O.'s action and in turn having confirmed invoking of Sec.145(3), was obliged to see whether the assessment has been made by the A.O. in the manner provided u/s 144 or not.
Alternatively however, if he says that the account were not rejected then the trading results as declared by the assessee must have been accepted and then there was no question of making any addition by the A.O. or any enhancement by the ld. CIT(A). 3.1 Fair estimation required - Legal Position: In these circumstances a pertinent question arise whether after the rejection of account and invoking of Sec.145(3), is there any scope of again referring to the same books of account finding various deficiencies, defects and faults and then to estimate the income on that basis. Although after rejecting the account it is not disputed that what is all required is a fair estimation. However, invoking of Sec.145 does not confer blind powers upon the AO and he is not at liberty to assess the income at whatever figure he wants. He is bound to make an honest estimation of income, keeping in view of the material available on record, past history of the case, local knowledge and repute of the assessee. He is also supposed to collect necessary material for the purpose, if so required. 8 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
The law is settled that in making fair estimation, one (be it the AO or the appellate authorities) needs some cogent material to justify its/their estimations. However, such material has essentially to be relevant, having a bearing over the issue in hand but not the same books of account which the AO and CIT(A) themselves have rejected finding various deficiencies, defects and faults therein.
An arbitrary, capricious and wild estimation, as done in the present case, is not at all permitted in the eyes of the law. The AO however, did not confirm to its settled requirement. Kindly refer Jotram Shershing vs. CIT 2 ITR 119 (All). 3.2 Addition Need Not Be Made, Even if Sec.145 Invoked: In the case of CIT v/s Gotan Lime Khaniz Udyog 256 ITR 243(Raj), it has been held that mere rejection of books of account need not necessarily lead to additions to the returned income. It was also held that the books of account , together with past history of the case as also material collected by the AO should be considered for estimation of income. When accounts rejected- No separate addition / disallowance permissible:- 4.1 In the present case, the authorities below on one hand have completly rejected the accounts admittedly invoking Sec.145(3) however, the CIT(A) seriously contradicted his own stand because the ld. CIT(A) has again fallen back and having referred to the same books of account which he has already rejected, drawn inferences based on which he has tried to find some undisclosed profits.
5. Similarly in various cases after rejection of accounts, disallowance u/s 40A(3) was made on account of cash payment or addition of cash creditors was made u/s 68 and so on. The Courts in those cases have held that the moment accounts are rejected, revenue cannot rely on same accounts for further addition.
6. Supporting Case Laws:
6.1.1 ITO vs. Nardev Kumar Gupta (2013) 142 ITD 0303 (JP) (DPB 36-38) wherein it was held that "When assessee's income was assessed by estimating profit after rejection of books of accounts, no disallowance can be made separately u/s 40A(3)"
6.1.2 The Hon'ble Allahabad High Court in CIT Vs Banwari Lal Banshidhar (1998) 229 ITR 229, 232 (All.) (DPB 1-3) held that:
"3. All the three questions, referred to this Court, revolve round the same controversy. The question for consideration is that when no deduction was sought and allowed under s. 40A(3), was there any need to go into s. 40A(3) and r. 6DD(j). We see force in the view taken by the Tribunal that when income of the assessee was computed applying the gross profit rate and that 9 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
when no deduction was allowed in regard to the purchases of the assessee, there was no need to look into the provisions of s. 40A(3) and r. 6DD(j). No disallowance could have been made in view of the provisions of s. 40A(3) r/w r. 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When gross profit rate is applied, that would take care of everything and there was no need for the AO to make scrutiny of the amount incurred on the purchases by the assessee."
6.1.3 The Hon'ble Rajasthan High Court in CIT vs. G.K. Contractor (2009) 19 DTR 305 (Raj.) (DPB 4-5) held that "7. Admittedly, the said amount of Rs. 38,28,086 was shown by the assessee in the books of account as "market outstanding". According to the assessee, the payment was outstanding against the labour and goods supplied. It is true that on being asked, the assessee was not able to explain these entries by producing the adequate proof to the satisfaction of the AO. However, in our considered opinion, even if the assessee has failed to discharge his onus of proof in explaining the cash credits shown in the books of account as "market outstanding", the AO having estimated the higher profit rate on total contract receipts after rejection of the books of account invoking the provisions of s. 145(3), no separate additions can be made on account of unexplained cash credit under s. 68 of the Act of 1961. We are in complete agreement with the view taken by the CIT(A), confirmed by the Tribunal. Thus, no substantial question of law arises for consideration of this Court in this appeal." 6.1.4 The Hon'ble Andhra Pradesh High Court in Indwell Constructions v CIT (1998) 232 ITR 776 (AP) (DPB 6-8) held that "4. The pattern of assessment under the IT Act is given by s. 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under s. 29 is to be made under s. 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the ITO may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed under s. 29. In other words, all the deductions which are referred to under s. 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in s. 40 is also taken into account.
5. No doubt there is big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have been taken into account by the ITO while making an estimate. If the CIT had 10 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
set aside the estimate on the ground that the vital fact that the business was carried on with own capital and not with borrowed capital has been ignored by the ITO, there may not have been any difficulty in upholding that order. But, when he proposes to add back an exact item in the P&L a/c, he was relying on the rejected books which he could not do as held by the Bench of this Court in Maddi Sudarsanam Oil Mills Co. vs. CIT (supra). There is also a further difficulty if s. 40, as argued by learned counsel, is to be taken into account even after making an estimate. When there are certain other deductions which are to be disallowed such as wealth-tax payment in s. 40, can it be said that after making an estimate, the wealth-tax charged in the P&L a/c should again be added back to the profit. This example, illustrates how the contention of the Revenue, that s. 40(b) makes a difference in the situation, is untenable. In our considered opinion, the answer to the question has to be in the negative and in favour of the assessee.
The question is answered accordingly."
6.1.5 Refer Maddi Sudarsanam Oil Mills Co. v/s CIT (1959) 37 ITR 369 (AP) (DPB 33-35).
6.1.6 The Hon'ble ITAT(Hyd) `B' bench in the case of ECI Engineering & Construction Co. Ltd in ITA No. 2048/Hyd/2011 (DPB 16-25) held that:
"where the books of account have been rejected the revenue cannot rely on the same books of account for making any other addition."
6.1.7 Also refer Samurai Techno Trading Co. (P) Ltd. v/s CIT (2010) 37 DTR 386 (Ker) (DPB 9-12).
6.1.8 CIT v/s Pravin & Co. 274 ITR 534 (Guj) 6.2 Very pertinently, even this very aspect has now been judiciously recognized even by the statute in terms of S.44AD / 44AF etc. i.e. presumptive taxation scheme where the assessee are not required to keep books of account which is (or the same thing where accounts though maintained but stood rejected) and therefore, an statuary estimated NP rate i.e. 8% in the case of contractor, is applied on the gross receipts and benefit of no further deduction is given. Thus, the principle is that the moment accounts are rejected the only and only course left is estimation and one cannot fall back on the same very account rejected. In the presumptive tax, there is no provision to look back into the accounts, once the assessee claimed as not maintained (or similarly in the normal cases of where S.145 is invoked). 6.3 The Hon'ble special bench in ITO v/s Kenaram Saha & Subhash Saha (2008) 116 TTJ 289 (Kol) (SB) wherein in para 24, it has been held that: 11 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
"When a net profit rate is applied, there remains no scope for further disallowance of any expenditure."
6.4 Enhancement, arbitrary, vindictive, based on surmises & conjectures: The theory applied by the ld. CIT(A), apart from being contradictory, was also against the prevailing trend being followed by the department itself consistently that in the cases of contractor where accounts are rejected continuously, NP rate is applied taking into account the relevant material and is also against the judicial recognition to such a practice. In addition, there are also serious defects/ mistakes which have rendered this theory completely incredible and illogical and hence, be not applied. The same is discussed hereunder:
7.1 The entire controversy has arisen from the conclusion drawn by ld. CIT(A) alleging from (-) negative stock which he noticed for the first time in October-2007 (AY 2008-09). There appears no sanctity of the cut-off date being 31st October, 2007 wherefrom the CIT(A) commenced his working taking the figure of the stock as nil and then applied the same in reverse manner.
7.2 Firstly, there is no logic why he should compute the closing stock on monthly basis at site and to compare with the books when it was submitted that there are running/ongoing projects which continue for more than one year and on the site, the assessee keeps on receiving the goods but due to late receipts of invoices, the same are accounted for later. The non booking of expenses in the same month resulted in negative stock. the CIT(A) also accepted this in principle in A.Y.2007-08 at pg 18 pr
13. 7.3 The relevant extract from the written submission before ld. CIT(A) are as under:
"3) In this regard it is submitted that Assessee is not engaged in sale and purchase of any particular goods for which Closing stock can't b negative, rather than assessee purchase goods for work execution for which receipt of goods and it's booking in the books of accounts is not on the same time. It is general trend in the Construction Industry that goods were supplied on regular basis on challans and used for work execution and their bills comes after long time on the basis of which entries were made in the books of accounts. The detailed chart produced to your good self on monthly basis contains the above defect and monthly Closing Stock worked out was just a imaginary figure because assessee closing stock is Closing WIP of Work done which can't be determined on monthly basis as execution of contracts works is on regular and continuous basis. Also from the chart our contention get support that only in two months out of whole year stock was negative i.e. in the month of July and August that falls in between of the year.
4) In the construction industry execution of civil works continued on a regular basis and generally payment were received after 2-3 month of work done or work reaches a particular stage of completion and during this goods and material were purchased and consumed for the construction activities and when assessee received payment form Government, payment were made to suppliers. It is important to mention here 12 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
that the monthly chart was prepared on casual basis cannot show the correct picture until and unless scrutiny of each and every expense should be carried out in a detailed manner.
5) Also your good self has taken Closing stock as on 31.08.2005 of Rs. 4 Lakhs and as on 31.08.2006 of Rs. 6 Lakhs for the assessee having turnover of more than 25 crore for both the years is on estimation which any concrete basis just on presumption. Moreover Difference between Opening stock and Closing stock was Rs. 12,02,526/- without taking into account estimation of stock as mentioned above, the difference being was already added by the A.O. during the course of Assessment proceedings.
6) Also your good self has mentioned that assessee is showing lesser margin of profit was again based on a belief, rather than showing comparative cases or instances. Assessee is showing the best profit margin as against prevailing in the Industry on such a huge turnover and assessee has maintained such trend in coming year's also."
7.4 Recognized method adopted consistently: In the cases of civil contractor income is normally estimated in two ways/ methods. First, is known as Completed Contract Method (CCM) where income is recognized only after the completion of that particular project. Second, is known as Percentage of Completion Method (PCM) where income is recognized every year during the continuance of the project. This has been recognized even by the Institute of Chartered Accountants of India (ICAI) also in its accounting standard, AS-7. What is being followed by the department in the case of the assessee consistently, is the second method by applying varying NP rates depending upon the circumstances of each year. The CIT(A) has not at all justified any strong circumstances warranting a deviation there from. 7.5 Theory of CIT(A) against Rule of Consistency: 7.5.1 A support to this legal proposition can be taken from the ratio laid in CIT v/s Bhawan Path Nirman (2002) 258 ITR 440 (Raj) (DPB 61-71). The principal laid was that it is a matter of fair estimation between the parties and if the AO makes estimation in a particular manner in one year, the same pattern has to be followed in the later years also as to avoid any distortion in making a fair estimation. In the cited case of a civil contractor, the AO added sales tax refund in the subjected year even after application of a particular NP rate. The Hon'ble Court (in the context of the admitted facts that every year accounts were being rejected and income being assessed after application of NP rate) held that the AO merely relied on the practice of assessing business income on estimation by applying NP rate and there was neither any deduction nor any addition/disallowance discernable from the estimations made in the current year or in the past years. Based on this proposition, the Hon'ble High Court deleted the separate addition made on account of sales tax refund.
It is a judicially accepted principle that when the facts are same, a uniform view should be adopted for the subsequent years in the income tax proceedings unless there is a material change in the facts, which has not been established by the CIT(A) 13 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
7.5.2 Radhaswami Satsang Vs. CIT 193 ITR 321 (SC), on the theory of consistency, has held as under:
" ..Strictly speaking, res judicatta does not apply to the income tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following, year , where a fundamental aspect permeating through different assessment years has been found as afact one way or the other and parties have allowed that position to ne sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year".
This view has been followed by in CIT v/s Neo Ploy Pack (P) Ltd (2000) 245 ITR 492 (Del), CIT v/s Gopal Purohit (2011) 336 ITR 287 (Bom) and M/s Hero MotoCorp Ltd. v/s Addl. CIT in ITA No.1980/Del/12 for A.Y.2007-08 vide order dated 11.06.2013.
7.6 Therefore, in the present case the only course left with the ld. CIT(A) was to appreciate the past history settled by superior authority i.e. ITAT which he could and should not have ignored and to decide the appeal in that light only. The ld. CIT(A) surprisingly, in a manner unheard, made enhancement in a very arbitrarily manner which was nothing short of an arbitrary, capricious and wild estimation in as much as in a lengthy discussion and conclusion, he did not refer to any material to justify his estimation.
7.7 Interestingly, in A.Y. 2009-10 & 2010-11 he did not apply his own theory.
8. Admittedly, it was not a case of a search or survey, where some evidences could be found justifying higher estimation of income and ignoring the past settled history based on the disclosed results nor the ld. CIT(A) appears to have got any purposeful enquiry conducted to justify his conclusions that expenses were inflated. There is no iota of evidence to show that a single penny of expenditure was inflated by the assessee to justify higher estimation nor there was any basis or cogent material to conclude that there was (-) negative closing stock resulting into undisclosed profits and hence, it was nothing but a surmises and conjectures. Pertinently, there is no allegation of unexplained purchases nor is the suppression of gross receipts alleged. At the year end there is no negative stock. There appears no logical way to infer any income more than declared.
9. No fair Estimation made:
9.1 Past History-Best Guide: We may submit that past history has been held to be the best guide in the cases of fair estimation. Kindly refer Kindly refer CIT v/s Gupta K.N. Construction Co. (2015) 116 DTR 377 (Raj), Vaibhav Gems 112 DTR 84 (Raj), CIT v/s Popular Electric Co. Pvt. Ltd (1993) 203 ITR 630 14 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
(Cal), MA Rauf v/s CIT (1958) 33 ITR 843 (Pat), CIT v/s Inami Marble 316 ITR 125 (Raj) (DPB 31-32).
9.2 However, it will appear that in the present case, neither the ld. AO nor the ld. CIT(A) has made a fair estimation in conformity of the above settled judicial guideline. On the contrary, he rather completely ignored the past history. It is not denied that the assessee was engaged in the business of civil contract in the past as also in the later years. The method & manner of carrying the work and accounting the transactions are the same. Therefore, there is no reason still not to consider the past history which is the best material to be used for fair estimation as per the binding decisions. The ld. AO is totally silent on this aspect.
10. Better Results: It is pertinent to note that the assessee has declared much better results in the current year as against last year. Kindly refer the following Comparative chart.
NP Rate Rate Upheld
Rate applied by
A.Y. Gross Receipt Net Profit Shown Applied by by ITAT
CIT(A)
(Before) AO PB 34-37
2002-03 Rs.8,32,19,457/- Rs.74,82,721/- 8.99% - - -
2003-04 Rs.19,24,20,561/- Rs.1,51,59,037/- 7.87% 9.30% 8.75% 8.50%
2004-05 Rs.20,49,43,321/- Rs.1,63,82,443/- 7.99% 9.30% 8.75% 8.50%
2005-06 Rs.23,62,72,053/- Rs.1,89,85,180/- 8.04% 9.50% 8.50% 8.50%
11.68%
11.00%
2006-07 Rs.24,27,14,639/- Rs.2,66,97,007/- 11.50% Pending
Enhancement of
(9.98%)*
Rs.1,84,824/-
Note: NP rate shown is before interest and depreciation etc. It is evident from the above comparative chart that the turnover declared this year has gone up from Rs.23.63 cr last year to Rs.24.27 cr this year. On the other hand the NP rate shown has also gone up from 8.04% last year to 11% this year. The AO itself has applied the maximum NP rate at 9.50% (subject to interest & depreciation) in A.Y.2005-06 and the Hon'ble ITAT in assessees own case in ITA No.586/JP/2007 & ITA No.60/JP/2008 from A.Y. 2003-04, 2004-05 and 2005-06 has already upheld NP rate of 8.50% (subject to interest & depreciation) (PB 34-47). Thus from all angles the result are much better. *Even if the receipts of Rs.1.37 Crores of earlier years are excluded NP rate will be 9.98%. Kindly refer para 4.2 of w/s of A.Y.2007-08. Hence, as such no addition was called for as was held in the case of Gotan Lime (supra).
11. Lastly, we also rely upon our written submissions (PB 1-12) filed before the ld. CIT(A).Hence, the impugned trading addition kindly be deleted in full." 15 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
4.5 On the other hand, the ld. DR relied upon the order of the authorities below and also relied on following case laws for enhancement of income and rejection of books of account.
1. CIT vs. Nuebheram Daluram,224 ITR 610 (SC)
2. Jute Corporation of India Ltd. vs. CIT, 187 ITR 688 (SC)
3. Popular Automobiles vs. CIT, 187 ITR 86 (Ker.)
4. CIT vs. Gotan Lime Khanij Udyog, 256 ITR 243 (Raj.)
5. CIT vs. Maharaja Shree Umed Mills Ltd. ,192 ITR 565 (Raj.)
6. Kachawala Gems vs. JCIT , 288 ITR 10 (SC)
7. Narsingdas Ramkishan Pungaliya vs. ACIT, 184 CTR 448 (Raj) 4.6 We have carefully considered the rival contentions and perused the material available on record. As regards the enhancement made by the ld. CIT(A), we do not accept the contention of the ld. AR that such enhancement is without jurisdiction in as much as there is no new item or income source has been discovered. However, we are not convinced with the method adopted by the ld. CIT(A) for the purpose of making the enhancement as discussed at page 10 to 13. We are convinced with the contention of the ld. AR that after rejecting the books of account u/s 145(3), there was no need for the ld. CIT(A) to again consider the same set of books of account and to work out the alleged shortfall of the stock 16 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
on monthly basis. Particularly, when it is neither the case of the AO nor of the ld. CIT(A) that the declared receipts were suppressed in any manner. It is also not a case of survey or search wherein, the evidences showing inflation of the expenses or suppression of receipt or closing stock is found by the authorities below. There are various decision of different Hon'ble High Courts including the Hon'ble Jurisdictional High Court wherein it was held that once the provisions of Sec.145(3) are invoked then no separate addition or disallowance could be made for estimating of closing stock etc. In the case of Indwell (Supra) the Hon'ble Andhra Pradesh High Court held that "4. The pattern of assessment under the IT Act is given by s. 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in ss. 30 to 43D. Sec. 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under s. 29 is to be made under s. 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the ITO may reject those books and estimate the income to the best of his judgment. When such an estimate is made it is in substitution of the income that is to be computed under s. 29. In other words, all the deductions which are referred to under s. 29 are deemed to have been taken into account while making such an estimate. This will also mean that the embargo placed in s. 40 is also taken into account.
5. No doubt there is big difference between profit earned with own capital and profit earned with borrowed capital and such a difference could have 17 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
been taken into account by the ITO while making an estimate. If the CIT had set aside the estimate on the ground that the vital fact that the business was carried on with own capital and not with borrowed capital has been ignored by the ITO, there may not have been any difficulty in upholding that order. But, when he proposes to add back an exact item in the P&L a/c, he was relying on the rejected books which he could not do as held by the Bench of this Court in Maddi Sudarsanam Oil Mills Co. vs. CIT (supra). There is also a further difficulty if s. 40, as argued by learned counsel, is to be taken into account even after making an estimate. When there are certain other deductions which are to be disallowed such as wealth-tax payment in s. 40, can it be said that after making an estimate, the wealth-tax charged in the P&L a/c should again be added back to the profit. This example, illustrates how the contention of the Revenue, that s. 40(b) makes a difference in the situation, is untenable. In our considered opinion, the answer to the question has to be in the negative and in favour of the assessee.
The question is answered accordingly."
It is noted that there are deficiencies in the working done by the ld. CIT(A) which does not carry any weight. It is also noted that the ld CIT(A) in A.Y.2007-08 & 2008-09 has also discussed with regard to some inflation of expenses in relation to the transactions with the sub- contractor M/s SJPS Builders & Contractors, making of cash payment, disallowance u/s 43B of the Act. However, since we have already rejected the method adopted by the ld. CIT(A) and in absence of any cogent evidence in support of the allegations brought on record, we have adopted the method of fair estimation after application of Sec.145(3) of the Act. 18 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
hence, there was no justification in discussing individual disallowances. Moreover, in A.Y.2008-09, the ld. CIT(A) himself found that the addition already made by the AO was more than the addition computed by him. Pertinently in A.Y.2009-10 & 2010-11, the ld. CIT(A) is completely silent on his own working. Therefore, the only proper course was to consider the fairness & correctness of estimation of NP rate made at the lower levels. For all these reasons, we reject the working adopted by the ld. CIT(A) and it is held that after application of Sec.145(3), it was only a case of fair estimation to be made keeping in mind the past history of the case as held by Hon'ble Rajasthan High Court in the case of CIT vs. Popular Art Palace (P) Ltd. (2017) 391 ITR 352. The average of past 4 years comes to 8.5% . The G.P. for the year is better than past 4 years average. As regards the estimation of income after rejection of the books of account from a perusal of the comparative charts, it is noted that the assessee has declared receipts of Rs.24.27 Crores this year as against Rs.23.63 Crores last year and the declared NP rate (subject to interest & depreciation) this year was 11% which is much better than the preceding year in A.Y.2005-06 at 8.04% and as also better from the last three preceding years from A.Y.2002-03 to 2004-05 wherein it ranged between 7.87 % to 8.99% only. It is also noted that the Coordinate Bench of ITAT 19 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
Jaipur in assessee's own case in A.Y.2003-04, 2004-05, 2005-06 have upheld NP rate of 8.50% (subject to interest & depreciation). The AO himself has applied 9.50% in immediately preceding year in A.Y.2005-06 therefore; there was no justification for him to apply 11.50%. For the same reasons the enhancement made by the ld. CIT(A), which, in terms of NP rate comes to 11.58% is also unjustified. It is also noted that the AO has not provided any basis of applying 11.50%. He neither referred past history nor any comparable case. Considering the totality of facts & circumstances therefore, we are satisfied that the results declared by the assessee of this year at NP rate of 11% (subject to interest & depreciation) is justified and the addition made by the AO of Rs.12,15,176/- and also the enhancement of Rs.1,84,824/- made by the ld. CIT(A), totaling to Rs.14 Lacs, was not fully justified. Since we have sustained the rejection of books of account and to plug the leakage of Revenue , we sustain addition of Rs. 2.00 lacs only. Thus ground of appeal no. 2 of the assessee is partly allowed.
5.1 The Ground of appeal no.3 of the assessee regarding the adhoc disallowances made by the AO totaling to Rs.1,24,830/- on account of depreciation on vehicles and depreciation on mobiles which has been sustained by the ld. CIT(A).
20 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
5.2 Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us against the sustenance of disallowance of Rs. 1,24,830/- 5.3 After going through the orders of the authorities below and the materials available on record, we hold that once the books of account are rejected and income is estimated then there is no further scope for any addition out of various expenses debit in profit and loss account. Therefore, we find no merit in the order of the ld. CIT(A) which is not justified in confirming the disallowance of Rs. 1,24,830/-. In this view of the matter the Ground No. 3 of the assessee is allowed 6.1 The Ground No .4 of the assessee is regarding charging interest u/s 234B & 234D of the Act and also withdrawing interest u/s 244A of the Act which is consequential in nature and mandatory Thus, the appeal of the assessee is partly allowed.
Appeal No. 496/JP/2013 assessment year 2007-08 7.1 In this appeal, the assessee has raised the following grounds of appeal :-
21 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
"1. The impugned additions and disallowances made in the order u/s 143(3) dated 26.11.2009 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.
2.1 Rs.80,07,358/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the application of Sec.145(3) of the Act. The provision so invoked and confirmed by the CIT(A) being contrary to the provisions of law and facts, the same may kindly be quashed. Consequently the trading addition of Rs.80,07,358/- may kindly be deleted in full.
Alternatively and without prejudice to above 2.2 The ld. CIT(A) further erred in law as well as on the facts of the case in confirming the addition of Rs.25,95,796/- made by the AO (by applying NP @ 9.50%) and further erred in enhancing the addition to Rs.54,11562/-. The addition so made & confirmed and further enhanced by the CIT(A) is totally contrary to the provisions of law and facts on the record and hence the addition may kindly be deleted in full.
2.3 The ld. CIT(A) further erred in law as well as on the facts of the case in enhancing the income which is without jurisdiction being totally contrary to the provisions of law and facts on the record and hence the addition may kindly be deleted in full.
3. The AO & ld. CIT(A) further erred in law as well as on the facts of the case in charging interest u/s 234D of the Act and as also in withdrawing interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full."
8.1 During the course of hearing, the ld. AR of the assessee has not pressed the Ground No. 1. Hence, the same is dismissed being not pressed.
9.1 Apropos Ground No. 2 (2.1, 2.2 and 2.3) of the assessee, the brief facts of the case that the assessee is engaged in civil contractor business mainly in constructing of canals for irrigation purpose. During the period the assessee executed contract at different sites. The return of income 22 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
was filed on 29.02.2008 declaring total income of Rs.2,63,81,750/-. During the year under consideration the assessee had shown gross contract receipts at Rs.41,14,68,583/- and NP rate of 9.73% (subject to Interest & depreciation) this year. The AO rejected the books of account, by applying the provisions of Sec.145 (3) of the Act and enhanced the NP rate @ 9.50% (subject to depreciation only) which NP rate comes to 10.36% (subject to Interest & depreciation ). Thus, the AO made addition of Rs.25,95,796/- to the declared income.
9.2 In first appeal, the ld. CIT(A) upheld the application of Sec. 145(3) of the Act and also issued a Show Cause Notice proposing enhancement. In response to Show Cause Notice appellant assessee filed detailed written submissions time to time before the ld. CIT(A) . The relevant findings of the ld. CIT(A), are as under:-
"Considering the above, the facts in this case can be summarized as under:-
i) The assessee was inflating the expenses related to sub-contractors and other expenses, the same were shown to have been paid in cash, where each payment was shown to have been less than Rs. 20,000/-.
ii) Some of the undisclosed profit remained with assessee as undisclosed closing stock which was reflected as negative closing stock in the charts prepared by us.
iii) The negative balance as on 31.10.2007 can be attributed to two things:-
a) Undisclosed opening stock as on 01.04.2007 (Closing stock as on 31.03.2007).
b) Actual G.P. being higher than the disclosed G.P. (on the basis of which the charts were prepared) during the period 01.04.2007 to 31.10.2007. 23 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
iv) In item No. (xiii), we have proposed enhancement of Rs. 93,09,412/- on the basis of negative stock. The assessee's turnover for the A.Y. 2007-08 was Rs.41.14 Crore and for the period 01.04.2007 to 31.10.2007 was Rs. 29.64 Crore. Therefore, 41.87% (29.64/70.78 x 100%) of this amount can be attributed higher income earned during the period 01.04.2007 to 31.10.2007. This amount comes to Rs. 38,97,850/-. This amount comes to Rs.38,97,850/-. Therefore, the additional income earned during this year comes to Rs.54,11,562/-.
Accordingly, the income of the assessee in the current year is enhanced by Rs.54,11,562/-, resulting to final addition of Rs.80,07,358/-." Conclusively, the ld. CIT(A) enhanced the addition made by the AO by Rs.54,11,562/- which finally resulted into total addition of Rs.80,07,358/-, which in terms of NP rate (subject to Interest & depreciation both) comes to 11.68%.
9.3 Being aggrieved, the assessee is before us challenging the application of Sec.145(3) of the Act and also confirmation of addition of Rs.80,07,358/- by the ld. CIT(A). It may be noted that during the course of hearing, the ld. AR of the assessee has not pressed the application of provisions of Section 145(3) of the Act, hence, the same is dismissed being part of Ground No. 2 9.4 During the course of the hearing, the ld. AR filed detailed written submissions along with comparative charts which are as under:
"1. Firstly, the application of S.145 is not disputed.
2. As regards the enhancement: it is submitted that since the facts and circumstances of this case are identical with the assessee`s own case in ITA No.495/JP/13 for A.Y.2006-07 hence, the submissions made in that year on enhancement kindly be 24 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
considered in the present case also. Moreover, the decision paper book filed in that case is equally relevant and relied upon in this case also apart from the paper book being filed in this case.
On merits:
3. No fair Estimation made:
3.1 Past History-Best Guide: We may submit that past history has been held to be the best guide in the cases of fair estimation. Kindly refer Kindly refer CIT v/s Gupta K.N. Construction Co. (2015) 116 DTR 377 (Raj), Vaibhav Gems 112 DTR 84 (Raj), CIT v/s Popular Electric Co. Pvt. Ltd (1993) 203 ITR 630 (Cal), MA Rauf v/s CIT (1958) 33 ITR 843 (Pat), CIT v/s Inani Marbles 316 ITR 125 (Raj).
3.2 However, it will appear that in the present case, neither the ld. AO nor the ld.
CIT(A) has made a fair estimation in conformity of the above settled judicial guideline. On the contrary, he rather completely ignored the past history. It is not denied that the assessee was engaged in the business of civil contract in the past as also in the later years. The method & manner of carrying the work and accounting the transactions are the same. Therefore, there is no reason still not to consider the past history which is the best material to be used for fair estimation as per the binding decisions. The ld. AO is totally silent on this aspect. 4.1 Last Year (i.e. A.Y. 2006-07) was not comparable: At the outset, there is no dispute on this aspect and even the authorities below have not followed A.Y. 2006-07 in this very or in any later years.
4.2 The result declared in A.Y. 2006-07 by showing NP rate of 11% (after interest and depreciation) was an abnormal year because of the peculiar facts involved in that case in as much as, there were certain old contracts, the receipts of which were received only this year whereas the related expenditure were already been incurred and debited in the earlier year/s. These projects were mainly NMC 7.882 51.50 Km (Receipts of Rs.95,90,354/-), GLTTP Project, Barmer (receipts of Rs.14,67,416/-) and balance work of NMC Km 30- 51.5 Km (Receipts of Rs.26,52,531/-) totaling to Rs.1,37,10,301/-. Kindly refer Annexure A to P&L A/c (PB-9) of A.Y.2006-07. Thus, out of the total contract receipts of Rs.24.27 crores declared this year, substantial receipt of Rs.1.37 crores, which amounts to 5.65% of the total declared receipts, was accounted for in this year only whereas the related expenditure were already booked in the earlier year. This has directly resulted in abnormal increase in the NP rate of 11% which, is evident from the fact that if such rates are reduced from the declared receipts and then NP is computed, the revised NP rate would compute 9.98% only.
5. Interest separately allowable: That, without prejudice to above, law is settled that when a estimated NP rate is applied after invoking the provisions of section 145 of the I.T. Act 1961, deduction for interest is to be allowed separately as upheld by the 25 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
Hon'ble High Court of Rajasthan in the case of CIT Vs. Jain Construction Co. and Others (1999) 156 CTR (Raj) 290 and (2001) 168 CTR (Raj) 365, CIT vs. Bhawan & Path Nirman (Bohra) & Co. (2002) 178 CTR 526/258 ITR 440 (Raj.) and ITAT, Jodhpur Bench in the case of Rikhabdas Jain Contractor Vs. Income Tax Officer (2001) 72 TTJ (Jd) 526.
In this case revenue had all along been allowing interest separately after applying NP rate however, without any special reason it is denied this year which is against the rule of consistency submitted earlier i.e. A.Y. 2006-07. Such interest of Rs. 35,52,581/- (PB-7), when allowed shall reduce NP rate by 0.86% and to 8.64% as per AO against which declared NP is already 9.73%.
6. Acceptable-Results:
6.1 It is pertinent to note that the assessee has declared acceptable results in the current year as against last year. Kindly refer the following Comparative chart.
NP Rate Upheld
Shown by ITAT
Rate applied by Rate applied by
A.Y. Gross Receipt Net Profit (before
AO CIT(A)
Int. &
Dep) PB 35
2002-03 Rs.8,32,19,457/- Rs.74,82,721/- 8.99% - - -
2003-04 Rs.19,24,20,561/- Rs.1,51,59,037/- 7.87% 9.30% 8.75% 8.50%
2004-05 Rs.20,49,43,321/- Rs.1,63,82,443/- 7.99% 9.30% 8.75% 8.50%
2005-06 Rs.23,62,72,053/- Rs.1,89,85,180/- 8.04% 9.50% 8.50% 8.50%
11.00% 11.58%
2006-07 Rs.24,27,14,639/- Rs.2,66,97,007/- (adjusted 11.50% Enhancement Pending
NP of
9.98%) Rs.1,84,824/-
9.73% 9.50%
(before (Subject to 11.68%
Rs.41,14,68,583/- Interest
Rs.4,00,46,600/- Depreciation
2007-08 & Dep.) only) Enhancement Pending
Increased by
of
69.52%
Rs.54,11,562/-
7.25% 10.36%
(after
26 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
Dep.) (Subject to
interest &
Depreciation
only)
9.50%
9.50%
(Subject to
(Confirmed
Depreciation
AO)
only)
Rs.54,72,55,102/-
2008-09 Rs.4,69,19,829/- 8.57% Pending
Increased by 33% 9.86%
9.86%
(Subject to
(Subject to
interest &
interest &
Depreciation
Depreciation
only)
only)
Note: NP rate shown is before/subject to interest and depreciation etc. It is evident from the above comparative chart that again this year also there is a sharp increase in the turnover from 24.27cr to 41.15cr which shows an increase by whopping 70%. The N.P declared at 9.73 % is certainly better than rate of 9.50% applied by the department in the past and 8.50 % upheld by the ITAT.
6.2 In any case, the appellant's turnover jumped nearly 70% at Rs. 41.15 Crores this year from 24.27 Crores last year. Needless to say that to achieve such abnormal increase in the turnover, one has to compromise on its margins and such a fact certainly deserved consideration in the matters of fair estimation Suresh Chand Nahata 45 TW 164 Para 9(JP), CIT v/s Amrapali Jewels (P) Ltd. (2012) 65 DTR 196 (Raj) and ITAT order of M/s Singhal Builders Contractor in ITA NO.904/JP/2012 & ITA No.896/JP/2012 vide order dated 20.08.2013. 6.3 Applying the principle of averages in the instant case, it will be observed that the average GP rate declared from assessment year 2004-05 to 2006-07 comes to 9.33%, as against which, the NP rate declared this year was 9.73%.
The declared GP rate is better than the average GP rate of the past years. Thus, there was no occasion for making any variation or did not confer any inference in the declared results.
27 ITA No. 495/JP/2013
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6.4 Lastly, even when compared with the adjusted NP of A.Y. 2006-07 at 9.98% as above, there is negligible fall of 0.25%.
Thus, the overall results so declared are much better than the past.
7. Lastly, we also rely upon our written submissions (PB 1-12) filed before the ld. CIT(A).
Hence the impugned trading addition kindly be deleted in full." 9.5 On the other hand, the ld. DR relied upon the order of the authorities below 9.6 We have carefully considered the rival contentions and perused the material available on record. As regards the enhancement made by the ld. CIT(A), we have already rejected such a working in A.Y.2006-07 in ITA No.495/JP/13 in assessee's own appeal (supra). Following the same, working adopted by the ld. CIT(A) for making the enhancement is hereby rejected and it is held that after application of Sec.145(3), it was only a case of fair estimation to be made keeping in mind the past history of the case or other comparable case as held by Hon'ble Jurisdictional High Court in the case of Popular Art Palace (P) Ltd. vs. CIT (supra). The average of past 5 years comes to 9%. As regards the estimation of income after rejection of the books of account from a perusal of the comparative charts, it is noted that the assessee has declared receipts of Rs.41.15 Crores this year as against Rs.24.27 Crores last year and the declared NP 28 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
rate (subject to interest & depreciation) of this year was 9.73% which is better than A.Y.2005-06 at 8.04% and also better from preceding years from A.Y.2002-03 to 2004-05 wherein, it was declared at 7.87 % to 8.99% only. It may be also noted that the Co-ordinate Bench of ITAT in assessee's own case in A.Y.2003-04, 2004-05, 2005-06 have upheld NP rate of 8.50% (subject to interest & depreciation). The AO himself has applied 9.50% in A.Y.2005-06. Moreover, the gross receipts have gone up from Rs.41.15 Crores which means an increase in the receipts by almost 70%. The assessee of course, declared 11% (subject to interest & depreciation) in the immediately preceding year i.e. A.Y.2006-07 however, as clarified by the ld. AR, the facts of that year are not comparable and the higher NP rate was only because of the circumstances prevailed in that year. It is pertinent to note that neither the AO nor the ld. CIT(A) followed A.Y.2006-07 while applying estimated NP rate or even while making enhancement of this year. Therefore, there was no justification for him to apply 9.50% (subject to depreciation only) or 10.36% (subject to interest & depreciation ). For the same reasons, enhancement made by the ld. CIT(A), which in terms of NP rate comes to 11.68% is also unjustified. It is also noted that the AO has not provided any basis of applying 9.50% (subject to depreciation only) or 10.36% 29 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
(subject to interest & depreciation ). He neither referred past history nor any comparable case. Considering the totality of facts & circumstances therefore, we are of the view that gross profit rate shown by the assessee of this year was better than average of past 5 years. However, we have upheld the rejection of books of account and to plug the leakage of Revenue, we sustain the addition of Rs. 3.00 lacs only. Thus the ground no. 2 of the assessee is partly allowed.
10.1 The Ground no.3 of the assessee is regarding charging of interest u/s 234D of the Act and also withdrawing interest u/s 244A which are consequential in nature and mandatory..
Thus, the appeal of the appellant assessee is partly allowed. ITA No. 497/JP/2013 A.Y. 2008-09 11.1 In this appeal, the assessee has raised the following grounds of appeal:-
"1. The impugned additions and disallowances made in the order u/s 143(3) dated 30.11.2010 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.
2.1 Rs.70,46,571/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the application of Sec.145(3) of the Act. The provision so invoked and confirmed by the CIT(A) being contrary to the provisions of law and facts, the same may kindly be quashed. Consequently the trading addition of Rs.70,46,571/- may kindly be deleted in full.
Alternatively and without prejudice to above 30 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
2.2 The ld. CIT(A) further erred in law as well as on the facts of the case in confirming the addition of Rs.70,46,571/- made by the AO (by applying NP @ 9.50%). The addition so made and confirmed by the CIT(A) is totally contrary to the provisions of law and facts on the record and hence the addition may kindly be deleted in full.
3. The AO & ld. CIT(A) further erred in law as well as on the facts of the case in charging interest u/s 234B & 234D of the Act. The appellant totally denies its liability of charging of any such interest. The interest so charged, being contrary to the provisions of law and facts, kindly be deleted in full."
12.1 During the course of hearing, the ld. AR of the assessee has not pressed the Ground No. 1.Hence, the same is dismissed being not pressed.
13.1 Apropos Ground No. 2 (2.1 and 2.2), of the assessee , the brief facts of the case are that the assessee is engaged in civil contractor business mainly in constructing of canals for irrigation purpose. During the period the assessee executed contract at different sites. The return of income was filed on 29.09.2008 declaring total income of Rs.3,58,08,130/-. During the year under consideration the assessee had shown gross contract receipts at Rs.54,72,55,102/- and NP rate of 8.57% (subject to Interest & depreciation) this year,. The AO rejected the books of account by applying the provisions of Sec.145 (3) of the Act and enhanced the NP rate @ 9.50% (subject to depreciation only) which NP 31 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
rate comes to 9.86% (subject to Interest & depreciation ). Thus, the AO made addition of Rs.70,46,571/- to the declared income. 13.2 In first appeal, the ld. CIT(A) upheld the application of Sec. 145(3) of the Act and also issued a Show Cause Notice proposing enhancement. In response to Show Cause Notice assessee filed detailed written submissions time to time. The relevant findings of the ld. CIT(A) at pages 21 & 22, to the issue in question are as under:-
"Considering the above, the facts in this case can be summarized as under:-
i) The assessee was inflating the expenses related to sub-contractors and other expenses, the same were shown to have been paid in cash, where each payment was shown to have been less than Rs. 20,000/-.
ii) Some of the undisclosed profit remained with assessee as undisclosed closing stock which was reflected as negative closing stock in the charts prepared by us.
iii) The negative balance as on 31.10.2007 can be attributed to two things:-
a) Undisclosed opening stock as on 01.04.2007 (Closing stock as on 31.03.2007).
b) Actual G.P. being higher than the disclosed G.P. (on the basis of which the charts were prepared) during the period 01.04.2007 to 31.10.2007. ©) In item No. (xiii), we have proposed enhancement of Rs. 93,09,412/- (in A.Y.2007-08) on the basis of negative stock. The assessee's turnover for the A.Y. 2007-08 was Rs. 41.14 Crore and for the period 01.04.2007 to 31.10.2007 was Rs. 29.64 Crore. Therefore, 41.87% (29.64/70.78 x 100%) of this amount can be attributed higher income earned during the period 01.04.2007 to 31.10.2007. This amount comes to Rs. 38,97,850/-." From the above, it can be seen that even by conservative estimate higher profit earned during part of the year i.e. 01-04-207 to 31-10-2007 comes to Rs. 38,97,850/-. Moreover, in the case of sub-contract given to M/s. JPS Builders, the expenses were inflated by Rs. 62,36,937/- during the year. The turnover related to JPS Builders was only 20% of the turnover.
32 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
During the year, the assessee has shown payment of Rs. 9,00,000/- in cash to M/s. JPS Builders, whereas only a payment of Rs. 5,00,000/- (refer Chart X) was made by self cheque on 28-05-2007 so there was excess cash payment shown by Rs. 4.00 lacs and eve Rs. 5,00,000/- paid by self cheque was disallowable u/s 43B. Even after giving benefit of telescoping, the minimum addition on specific points comes t Rs. 67,36,971/- (Rs. 62,36,973/- inflation of expenses + Rs. 5,00,000/- u/s 43B) Therefore, addition of Rs. 70,46,571/- by AO was most reasonable and therefore, confirmed.'' The ld. CIT(A) however, made no enhancement in as much as per his working, the total additions came to Rs.67,36,973/- only which being below the addition already made by the AO at Rs.70,46,571/- hence, the same was confirmed. Thus, in effect the NP rate @ 9.50% (subject to depreciation only) or 9.86% (subject to Interest & depreciation) , stood confirmed.
13.3 Being aggrieved, the assessee is before us who has challenged the application of Sec.145(3) of the Act and also confirmation of addition of Rs.70,46,571/- by the ld. CIT(A). It may be noted that at the time of hearing of the appeal, the ld. AR of the assessee has not pressed the application of provision of Section 145(3) of the Act. Hence the same is dismissed being part 2 of the ground.
13.4 During the course of the hearing, the ld. AR filed detailed written submissions along with comparative charts which are as under:-
"1. Firstly, the application of S.145 is not disputed.33 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
2. As regards the enhancement: it is submitted that since the facts and circumstances of this case are identical with the assessee`s own case in ITA No.495/JP/13 for A.Y.2006-07 hence, the submissions made in that year on enhancement kindly be considered in the present case also. Moreover, the decision paper book filed in that case is equally relevant and relied upon in this case also apart from the paper book being filed in this case. On merits:
3. No fair Estimation made:
3.1 Past History-Best Guide: We may submit that past history has been held to be the best guide in the cases of fair estimation. Kindly refer Kindly refer CIT v/s Gupta K.N. Construction Co. (2015) 116 DTR 377 (Raj), Vaibhav Gems 112 DTR 84 (Raj), CIT v/s Popular Electric Co. Pvt. Ltd (1993) 203 ITR 630 (Cal), MA Rauf v/s CIT (1958) 33 ITR 843 (Pat).
3.2 However, it will appear that in the present case, neither the ld. AO nor the ld. CIT(A) has made a fair estimation in conformity of the above settled judicial guideline. On the contrary, he rather completely ignored the past history. It is not denied that the assessee was engaged in the business of civil contract in the past as also in the later years. The method & manner of carrying the work and accounting the transactions are the same. Therefore, there is no reason still not to consider the past history which is the best material to be used for fair estimation as per the binding decisions. The ld. AO is totally silent on this aspect.
4. Interest separately allowable: That, without prejudice to above, law is settled that when a estimated NP rate is applied after invoking the provisions of section 145 of the I.T. Act 1961, deduction for interest is to be allowed separately as upheld by the Hon'ble High Court of Rajasthan in the case of CIT Vs. Jain Construction Co. and Others (1999) 156 CTR (Raj) 290 and (2001) 168 CTR (Raj) 365, CIT vs. Bhawan & Path Nirman (Bohra) & Co. (2002) 178 CTR 526/258 ITR 440 (Raj.) and ITAT, Jodhpur Bench in the case of Rikhabdas Jain Contractor Vs. Income Tax Officer (2001) 72 TTJ (Jd) 526.
In this case revenuer had all along been allowing interest separately after applying NP rate however, without any reason it is denied this year which is against the rule of consistency submitted earlier i.e. A.Y. 2006-07.
5. Acceptable-Results:
5.1 It is pertinent to note that the assessee has declared much better results in the current year as against last year. Kindly refer the following Comparative chart.34 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
NP Rate Rate Shown Rate applied by Upheld
A.Y. Gross Receipt Net Profit
Shown by AO CIT(A) by ITAT
2002-03 Rs.8,32,19,457/- Rs.74,82,721/- 8.99% - - -
2003-04 Rs.19,24,20,561/- Rs.1,51,59,037/- 7.87% 9.30% 8.75% 8.50%
2004-05 Rs.20,49,43,321/- Rs.1,63,82,443/- 7.99% 9.30% 8.75% 8.50%
2005-06 Rs.23,62,72,053/- Rs.1,89,85,180/- 8.04% 9.50% 8.50% 8.50%
11.58%
2006-07 Rs.24,27,14,639/- Rs.2,66,97,007/- 11.00% 11.50% Enhancement of Pending
Rs.1,84,824/-
9.50%
Rs.41,14,68,583/- 10.82%
Rs.4,00,46,600/- 9.73%
2007-08 Subject to Pending
Increased by Enhancement of
Depreciation
69.52% Rs.54,11,562/-
only
9.50%
9.50%
Rs.54,72,55,102/-
2008-09 Rs.4,69,19,829/- 8.57% Subject to Pending
(Confirmed
Increased by 33% Depreciation
AO)
only
Note: NET PROFIT rate shown is before/subject to interest and depreciation etc. 5.2 It is evident from the above comparative chart that again this year also there is a sharp increase in the turnover from 41.15 cr to 54.33 cr that is an increase by 33 %. The NP declared 8.57%, better than 8.50 % upheld by this Hon'ble bench in past three years and hence the result declared are certainly better particularly when there is a substantial increase in the turnover. In any case, the appellant's turnover jumped nearly 33% at Rs. 54.72 Crores this year from 41.14 Crores last year. Needless to say that to achieve such abnormal increase in the turnover, one has to compromise on its margins and such a fact certainly deserved consideration in the matters of fair estimation Suresh Chand Nahata 45 TW 164 Para 9(JP), CIT v/s Amrapali Jewels (P) Ltd. (2012) 65 DTR 196 (Raj) and ITAT order of M/s Singhal Builders Contractor in ITA NO.904/JP/2012 & ITA No.896/JP/2012 vide order dated 20.08.2013. 5.3 Result of this year cannot be compared with A.Y. 2006-07 in as much as the receipts are more than double and also that year was abnormal because the high NP rate declared was also on account of some extra receipts of earlier year. Otherwise 35 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
prior the to the declared NP varied in 8% to 9% only. Kindly refer para-4 of w/s in A.Y. 2007-08
6. Lastly, we also rely upon our written submissions (PB 1-9) filed before the ld. CIT(A)..
Hence, the impugned trading addition kindly be deleted in full." 13.5 On the other hand, the ld. DR relied upon the orders of the authorities below .
13.6 We have carefully considered the rival contentions and perused the material available on record. As regards the enhancement made by the ld. CIT(A), we have already rejected such a working after discussion made our order in A.Y.2006-07 in ITA No.495/JP/13 (supra). Following the same, working adopted by the ld. CIT(A) for making the enhancement is hereby rejected and it is held that after application of Sec.145(3) of the Act , it was only a case of fair estimation to be made keeping in mind the past history of the case or other comparable case, if any cited by the parties and relevant material hence. As regards the estimation of income after rejection of the books of account from a perusal of the comparative charts, it is seen that the assessee has declared receipts of Rs.54.73 Crores in this year as against Rs.41.15 Crores of last year and the declared NP rate (subject to interest & depreciation) this year was 8.57% which is better from A.Y.2003-04 & 2004-05 wherein, it was declared at 36 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
7.87 % & 7.99% only. It may be noted that ITAT Jaipur Co-ordinate Bench in assessee's own case in A.Y.2003-04, 2004-05, 2005-06 have upheld NP rate of 8.50% (subject to interest & depreciation). The AO himself has applied 9.50% in A.Y.2005-06. Moreover, the gross receipts have gone up from Rs.41.15 Crores last year to Rs.54.73 Crores this year, which means an increase in the receipts by 33%. It is also settled that for the purpose of fair estimation an overall view should be formed, considering the past history of few years. Accordingly, the average of immediately past five years i.e. A.Y.2003-04 to 2007-08 (considering the adjusted NP rate of 9.98% in A.Y.2006-07), the average NP rate comes to 8.72% (approx.) while assessee had declared 8.57%. There was increase in turnover by 33%. Therefore, there was no justification to apply 9.50% (subject to depreciation only) or 10.36% (subject to interest & depreciation ). Considering the totality of facts & circumstances of the case, past history and increase in turnover , we uphold the addition of Rs. 4.00 lacs only. Thus ground of appeal no. 2 of the assessee is partly allowed.
37 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
14.1 The Ground No. 3 of the assessee is regarding charging of interest u/s 234B & 234D of the Act which are consequential in nature and mandatory .
Thus, the appeal of the assessee is partly allowed.
ITA No. 2/JP/2014 A.Y. 2009-10 (Revenue) 15.1 The Revenue has raised the solitary ground as under:-
''On the facts and in the circumstances of the case, the ld.
CIT(A) has erred in restricting the trading addition of Rs. 45,93,905/-
to token addition of Rs. 10,00,000/- only while rejection of books results has been upheld.'' 15.2 The brief facts of the case are that the assessee is engaged in civil contractor business mainly in constructing of canals for irrigation purpose. During the period the assessee executed contract at different sites. The return of income was filed on 29.09.2009 declaring total income of Rs.2,32,28,500/-. During the year under consideration the assessee had shown gross contract receipts at Rs. 36,39,25,564/- and NP rate of 11.54% (before Interest & depreciation) and NP rate of 5.46% (after all the deductions) this year. The AO rejected the books of account 38 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
by applying the provisions of Sec.145 (3) of the Act and enhanced the NP rate @ 7% (after all the deductions) which NP rate comes to 13.08% (before Interest & depreciation). Thus, the AO made addition of Rs.55,93,509/- to the declared income.
15.3 In first appeal, the ld. CIT(A) upheld the application of Sec. 145(3 of the Act however, he reduced the addition partly upto Rs.10,00,000/-. The relevant findings of the ld. CIT(A) at para 4.12 of his order are as under:-
''4.12" Considering the past history of case, the facts being similar, rejection of books of account u/s 145(3) is upheld. Ground No.1 is therefore, dismissed.
However, the estimation of income appears to be on higher side due to following reasons:-
(i) The turnover reduced form Rs.54.72 crores to Rs.36.39 crores.
(ii) Depreciation went up by Rs.55 lacs
(iii) G.P. comes to 19.40% as against declared G.P. of 12.92% (approximate) in earlier year.
Considering the above in my opinion a token addition of Rs.10,00,000/- would meet the ends of justice.
39 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
The addition of Rs.10,00,000/- is therefore confirmed, the assessing officer is directed to delete balance addition of Rs.45,93,509/-. These grounds of appeal are, therefore, partly allowed. "
15.4 During the course of hearing, the ld. DR relied on the order of the AO and prayed that the ld. CIT(A) has erred in restricting the addition of Rs. 45,93,509/- to token addition of Rs. 10,00,000/- only while the rejection of books results of the assessee has been upheld.
15.5 On the other hand, the ld. AR of the assessee supported the order of the ld. CIT(A) . However, during the course of the hearing, the ld. AR filed detailed written submissions along with comparative charts which are being reproduced as under:-
"1.1 Fair estimation required - Legal Position: At the very outset, it is submitted that even invoking of S.145 does not confer blind powers upon the AO and he is not at liberty to assess the income at whatever figure he wants. He is bound to make an honest estimation of income, keeping in view of the material available on record, past history of the case, local knowledge and repute of the assessee. He is also supposed to collect necessary material for the purpose, if so required. An arbitrary, capricious and wild estimation, as done in the present case, are not at all permitted in the eyes of the law. The ld. AO however did not confirm to its settled requirement. Kindly refer Jotram Shershing vs. CIT 2 ITR 119 (All).40 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
1.2 Addition Need Not Be Made, Even if Sec.145 Invoked : In the case of CIT vs. Gotan Lime Khaniz Udyog 256 ITR 243 (Raj), it has been held that mere rejection of books of accounts need not necessarily lead to additions to the returned income. It was also held that the books of account , together with past history of the case as also material collected by the AO (of course, after confronting the appellant) should be considered for estimation of income.
2. Better Results: 2.1 We may submit that past history has been held to be the best guide in the cases of fair estimation. Kindly refer Kindly refer CIT v/s Gupta K.N. Construction Co. (2015) 116 DTR 377 (Raj), Vaibhav Gems 112 DTR 84 (Raj), CIT v/s Popular Electric Co. Pvt. Ltd (1993) 203 ITR 630 (Cal), MA Rauf v/s CIT (1958) 33 ITR 843 (Pat). The appellant, this year declared NP rate of 11.54% (before interest & depreciation) as against 8.57% (before interest & depreciation) in the immediately preceding year i.e. A.Y.2008-09.
COMPARATTIVE CHART OF N.P. FOR THREE YEARS ASSESSMENT YEAR 2007-08 (Rs.) 2008-09 (Rs.) 2009-10 (Rs.) Gross Turnover 41,14,68,583/- 54,72,55,102/- 36,39,25,564/- N.P. Shown 2,62,79,130/- 3,35,53,099/- 1,98,81,280/- N.P. rate (including interest & after all 6.39% 6.13% 5.46% deduction) Add : Interest 35,52,881/- 19,77,166/- 52,28,655/-
" Depreciation 1,02,14,589/- 1,13,89,564/- 1,68,80,831/-
N.P. Before Interest, Salary & Deprn. 4,00,46,600/- 4,69,19,829/- 4,19,90,766/-
N.P. Rate before Interest, Salary & 9.73% 8.57% 11.54% Deprn.
Thus the result declared this year is better than last year, if N.P. Rate before Interest, Salary & Deprn., is considered.
2.2 Only operational results to be compared:- It is necessary to clarify that the ld. AO seriously erred in applying flat NP rate which is after reducing the deductions on account of interest, salary and depreciation, which is completely contrary to the settled practice adopted by the assessee and department both and the settled law Kindly refer CIT Vs. Jain 41 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
Construction Co. and Others (1999) 156 CTR (Raj) 290, Rikhabdas Jain Contractor Vs. ITO (2001) 72 TTJ (Jd) 526, Teja Construction vs. ACIT (2010) 129 TTJ 57 (Hyd)(UO), ITO Vs. Shri Ram Traders (2013) 90 DTR 217 (Jd.), in as much as to judge the reasonableness of the operating(trading) results, the indirect cost in the shape of interest, and depreciation should not be considered in as much as the same do not truly reflect the operating results having no nexus and keep on varying every year depending upon the facts. A heavy investment in the plant and machinery in one year will result in substantial increase in depreciation and the consequent reduction in the final NP rate, which is also one of the reasons of fall of NP rate this year. Similarly making payment of amount of interest in one year on huge amount of loan taken will also again reduce the NP rate. It is under this background therefore, the Hon`ble Tribunals and Courts have been taking a consistent view of considering the NP rate subject to such type of deductions so as to correctly judge the reasonableness of the trading results declared as compared to other years / other parties. Earlier the CBDT Circular: No.29-D(XIX-14) [F. No. 45/239/65-ITJ], dated 31-8-
1965 and now the provisions contained u/s 44AD have also statutory recognized this practice. However, without any plausible reason, the AO applied flat NP rate of 7% in this year without allowing these deductions. Therefore, the AO must have considered the NP rate subject to these deductions only. The AO himself adopted this principle but now changed with any justifiable reason.
2.3 Much Better Result: Accordingly, the above chart clearly shows much better result declared this year i.e. N.P. rate before interest and depreciation at 11.54% as against 8.57% and 9.73% in the preceding two years respectively and this did not at all call for any addition by the AO nor even a part sustenance by the ld. CIT(A) upto Rs.10 lakhs. Therefore, the appeal of the department deserves to be dismissed.
2.4 The AO itself had applied the maximum NP rate at 9.50% in A.Y.2005-06 and the Hon'ble ITAT in assessees own case in ITA No.586/JP/2007 & ITA No.60/JP/2008 from A.Y. 2003-04, 2004-05 and 2005-06 has already upheld NP rate of 8.50%. Thus from all angles the result are much better.
3. Reasons for low N.P.: Still assuming that the AO was correct (though not conceding) in his approach of considering and comparing the NP rate after all deductions, though there is a fall in net profit this year of 5.46% as against 6.13% last year (i.e. fall of 0.67%) yet however, there are very cogent reasons and material available this year which has more than justified the fall in N.P rate. Detailed reasons were submitted before the AO, discussed with him and some of them were even admitted by him also but were not taken into consideration this year while making estimation and hence his estimation was not fair.
3.1 One of the distinguishing feature this year which must be considered in the matter of fair estimation is that the turnover this year has decreased by more than 33% as compared to last year (i.e. from Rs. 54.72 crore to Rs. 36.39 crore) and 12% as compared to the 42 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
year before last (i.e. from Rs. Rs 41.14 crore) which strongly justify the fall in NP rate in as much as it is a matter of common knowledge there are various fixed type of expenditure viz salary and wages to the permanent laborers and administrative staff, minimum light, water and electricity charges, telephone and other expenses, annual license fees etc and so on which, the businessman/contractor has to pay whether he runs the business or not and irrespective of the facts of the receipts increase or decrease.
3.2 Notably the percentage of claim of depreciation to turnover this year stood at 4.64% as compared to such ratio in the preceding year ranging between to 2.08% to 3.30%, showing increase of 1.34% to 2.56%. Kindly refer comparative chart (PB-21).
Hence, the AO erred in enhancing the NP rate even by going his approach. The ld. CIT(A) was justified in not fully confirming the addition hence the appeal of revenue kindly be dismissed."
15.6 We have carefully considered the rival contentions and perused the material available on record. As regards the estimation of income after rejection of the books of account from a perusal of the comparative charts , it is seen that the assessee has declared NP rate (subject to interest & depreciation) of this year was 11.54% this year which is certainly better from 8.57 % & 9.73% in A.Y.2008-09 & 2007-08 respectively. The same was also better from the last three preceding years from A.Y.2002-03 to 2004-05 wherein it ranged between 7.87 % to 8.99% only. It is also observed that ITAT Jaipur Co-ordinate Bench in assessee's own case in A.Y.2003-04, 2004-05, 2005-06 have upheld NP rate of 8.50% (subject to interest & depreciation). The AO himself has applied 9.50% in A.Y.2005-
06. It is noted that the assessee has declared better results even if NP rate 43 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
after deductions is considered. It is seen that the NP rate (after all deductions) declared this year was 5.46% only as against 6.13% last year and thus, there was fall of 0.67%. However, it is noticed that the assessee has declared receipts of Rs.36.39 Crores only this year as against Rs.54.73 Crores last year and thus, the same has drastically came down by 33%. It is a fact that despite decrease in the turnover, the assessee has to bear certain fixed expenditure and the depreciation allowance which affects the ultimate NP rate (after all deductions). It is noticed that the amount of depreciation of this year has increased by Rs.55 Lacs i.e. Rs.1.14 Crores from last year to Rs.1.69 Crores this year. This extra claim of deprecation has contributed to a fall of 2.56% NP rate. It is also noted that AO has not provided any basis of applying 7% (after all the deductions) or 13.08% (subject to interest & depreciation ). He neither referred past history nor any comparable case. Considering the totality of facts & circumstances of the case, we find that that the addition of Rs. 55,93,509/- was rightly reduced by the ld. CIT(A) to Rs.10 lacs which is confirmed. Thus the solitary ground of the Revenue is dismissed. ITA No. 823/JP/2014 A.Y. 2010-11 (Revenue) 16.1 The Revenue has raised the solitary ground as under:- 44 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
''On the facts and in the circumstances of the case, the ld. CIT(A) has erred in restricting the addition of Rs. 57,44,388/ made by the AO by applying the net profit rate of 8% after depreciation and interest on gross contract receipts to Rs. 15.00 lacs by not adopting harmonious interpretation on AO's above said decision.'' 16.2 The brief facts of the case are that the assessee is engaged in civil contractor business mainly in constructing of canals for irrigation purpose. During the period the assessee executed contract at different sites. The return of income was filed on 10.10.2010 declaring total income of Rs. 4,37,71,220/-. During the year under consideration the assessee had shown gross contract receipts at Rs.57,57,96,344/- and NP rate of 9.39% (subject to Interest & depreciation ) or 7% (after all the deductions) this year. The AO rejected the books of account, applying provision of Sec.145 (3) of the Act and enhanced the NP rate @ 8% (after all the deductions) . The relevant para of AO's order for making addition is as under:-
''....However, the books of account are hereby rejected u/s 145(3) of the I.T. Act,1961.Considring the totality of the available on record, net profit rate @ 8% is applied on the gross contract receipts of Rs. 57,57,96,344/- after allowing claim of depreciation and interest. Accordingly, addition of Rs. 57,44,388/- is made to the total income as under:-
Net profit shown as per P&LL account Rs. 4,03,19,320
Net profit rate applied at 8% as discussed above on
Total contract receipts of Rs. 57,57,96,344 comes to Rs. 4,60,63,708
Addition Rs. 57,44,388
Thus, the AO made addition of Rs. 57,44,388/- to the declared income.45 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
16.3 In first appeal, the ld. CIT(A) upheld the application of Sec.
145(3) of the Act however, the ld. CIT(A) reduced the addition partly upto Rs.15,00,000/-. The relevant findings mentioned at pages 13 & 14 of the ld. CIT(A)'s order are as under:
''I have gone through assessee's submission and AO's findings.
Considering the past history and findings given by the AO, rejection of books of accounts, is upheld.
The AO in the assessment has assessed the interest income of Rs.1,75,25,724/- as income from other sources. Therefore, the income from business after re-computation (excluding interest income) comes to Rs.2,27,93,596/- (Rs.4,03,19,320 - Rs.1,75,25,724).
In the assessment order the AO has given the following finding:-
"Considering the totality of the facts available on record, net profit rate @ 8% is applied on the gross contract receipts of Rs.57,57,96,344/- after allowing claim of depreciation and interest".
However, in the computation, the AO did not reduce depreciation and interest from net profit computed @ 8%. As per the correct calculation (giving effect to the AO's finding), the income from business should be as under:
Turnover Rs.57,57,96,344/-
Net profit @ 8% Rs.4,60,63,708/-
Less: i) Interest Rs.1,49,30,007/-
ii) Depreciation Rs.1,63,42,697/- Rs.3,12,72,704/-
Income from Business Rs.1,47,91,004/-
Therefore, as per AO's finding itself the correct income of assessee from business comes to Rs.1,47,91,004/- as against this, the correct business income declared by assessee (after excluding interest income) comes to Rs.2,27,93,596/-. This shows that if we apply AO's finding, the income of assessee would go down.
The declared income before interest and depreciation comes to Rs.5,40,66,300/- which gives a net profit rate of 9.39%. 46 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
Considering the above, I am of the opinion that an addition of Rs.15,00,000/- would meet the end justice. The income of assessee would be Rs.5,55,66,300/- before depreciation and interest, this gives net profit rate of 9.65% before interest and depreciation. Assessee's net income after interest and depreciation would be Rs.2,42,93,596/-. The AO is directed to take assessee's net business income at Rs.2,42,93596/-."
16.4 During the course of hearing, the ld. DR relied on the order of the AO and prayed that the ld. CIT(A) has erred in restricting the addition of Rs. 57,44,388/- to Rs. 15.00 lacs.
16.5 On the other hand, the ld. AR of the assessee supported the order of the ld. CIT(A) and during the course of the hearing, the ld. AR filed detailed written submissions along with comparative charts which are as under:-
"A. Invalid application of Sec.145 (3):
It is submitted that the appellant has maintained complete books of account consisting of cash book, ledger and journal. All the purchases and sales are fully vouched. All the expenses were fully supported by vouchers. The financial accounts and the other subsidiary records were duly maintained. Further the accounts were subjected to Tax Audit u/s 44AB (PB 4-9). The same were produced before the AO also along with other details from time to time. The AO has not at all judiciously considered submissions made before the AO. Minor irregularities, even assuming were there, cannot be made a basis of the rejection of the books of accounts or of trading addition. Kindly refer Padampath Ramgopal 76 ITR 719 (SC).
Hence the invoking of section 145 please be quashed and consequently the impugned additions be deleted in full.
B. On merits: Alternatively, on merits also, there was no case with the AO to have made this addition, as submitted herein below:
1.1 Fair estimation required - Legal Position: At the very outset, it is submitted that even invoking of S.145 does not confer blind powers 47 ITA No. 495/JP/2013 Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
upon the AO and he is not at liberty to assess the income at whatever figure he wants. He is bound to make an honest estimation of income, keeping in view of the material available on record, past history of the case, local knowledge and repute of the assessee. He is also supposed to collect necessary material for the purpose, if so required. An arbitrary, capricious and wild estimation, as done in the present case, are not at all permitted in the eyes of the law. The ld. AO however did not confirm to its settled requirement. Kindly refer Jotram Shershing vs. CIT 2 ITR 119 (All).
1.2 Addition Need Not Be Made, Even if Sec.145 Invoked : In the case of CIT v/s Gotan Lime Khaniz Udyog 256 ITR 243 (Raj), it has been held that mere rejection of books of accounts need not necessarily lead to additions to the returned income. It was also held that the books of account , together with past history of the case as also material collected by the AO (of course, after confronting the appellant) should be considered for estimation of income.
2. Better Results: 2.1 We may submit that past history has been held to be the best guide in the cases of fair estimation. Kindly refer Kindly refer CIT v/s Gupta K.N. Construction Co. (2015) 116 DTR 377 (Raj), Vaibhav Gems 112 DTR 84 (Raj), CIT v/s Popular Electric Co. Pvt. Ltd (1993) 203 ITR 630 (Cal), MA Rauf v/s CIT (1958) 33 ITR 843 (Pat). The appellant, this year declared NP rate of 6.55% (after interest & depreciation) as against 5.46% (after interest & depreciation) in the immediately preceding year i.e. A.Y.2009.10.
NP Rate Rate applied Rate applied
A.Y. Gross Receipt Net Profit
Shown by AO by CIT(A)
8.57%
Subject to Dep. 9.50%
9.50%
Rs.4,69,19,8 & Int.)
2008-09 Rs.54,72,55,102/- Subject to
29/- (Confirmed
Depreciation
AO)
only
6.13% (After
Dep. & Int)
7%
Rs.1,98,81,2 5.46% 5.74%
2009-10 Rs.36,39,25,564/-
80/- (No Further
(After Dep. & Lumpsum
deduction
48 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
Int.) allowed) Rs.10 lakhs
7.26%
7%
8% lumpsum
Rs.57,57,96,344/- (Including Net
(Including Rs.15 lakhs
(Increase of Rs.4,03,19,3 interest but
2010-11 Net interest
58.27% from the 20/- after (Including
previous year but after all Net interest
Depreciation
deductions) but after all
and Interest)
deductions)
Thus the result declared this year is better than last year, if N.P. Rate after Interest, Salary & Deprn., is considered. 2.2 Much Better Result: A bare perusal of the chart clearly shows much better result from all angles in as much as:
I Firstly, the NP declared (after interest and depreciation) at 7%, when compared with 5.46% and 6.13% in the preceding two years respectively.
II The turnover has also increased from Rs.36.39 crores last year to Rs.57.58 crores resisting an sharp increase of 58.27% and despite such increase, the assessee has been able to show much better result. The gross receipts were higher even than the year before last. When from Rs.54.73 crores in A.Y. 2008-09 to Rs.57.58 crores in this A.Y. has been declared.
III The AO himself had applied NP rate 7% (after all deductions) when the gross receipts were Rs.36.39 crores whereas, in this year, despite the assessee showing heavyily increased gross receipts of Rs.57.58 crores, could show NP rate 7%(after interest and depreciation) which, normally should have been lesser.
IV Further, the AO itself had applied the maximum NP rate at 9.50% in A.Y.2005-06 and the Hon'ble ITAT in assessee own case in ITA No.586/JP/2007 & ITA No.60/JP/2008 from A.Y. 2003-04, 2004-05 and 2005-06 has already upheld NP rate of 8.50% only.
Thus, from all angles the declared result are much better, not at all calling for any interference. Therefore, the very addition made by the AO was not at all warranted but even there was no reason at all for the ld. CIT(A) to have sustained even the part addition of Rs.15 lakhs. Further, the assessee's conduct in not filing further appeal to close the litigation, despite such strong facts being in its favor, must be appreciated.
3 Lastly, we strongly rely upon the order of the ld. CIT (A) and our written submission reproduced in his order.
49 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
Therefore, the appeal of the revenue kindly be dismissed." 16.6 We have carefully considered the rival contentions and perused the material available on record. As regards the estimation of income after rejection of the books of account from a perusal of the comparative charts , it is seen that the assessee has declared NP rate (after all the deduction but including interest income) in this year was 7% this year as against 5.46% & 6.13% in the preceding 2 years respectively, which are better. Moreover, the gross receipts have gone up from Rs.36.39 Crores last year to Rs.57.58 Crores in this year, which means an increase in the receipts by more than 58%. It is observed that the AO has not provided any basis of applying 8% (after all the deductions) or 10.39% (subject to interest & depreciation both). He neither referred past history nor any comparable case. It is also noted that the ld. CIT(A) has examined the merits and gave detailed reasoning's with which, we are in full agreement. Therefore, considering the totality of facts & circumstances of the case, we are find that that the addition of Rs. 57,44,388/- was rightly reduced by the ld. CIT(A) to Rs.15 lacs. which is hereby confirmed. Thus the solitary ground of the Revenue is dismissed.
50 ITA No. 495/JP/2013
Shri Harbans Lal Sethi vs. Addl. CIT, Range-2, Kota .
17.0 In the result, the appeals of the assessee are partly allowed and that of the Revenue are dismissed.
Order pronounced in the open Court on 30 /05/2017
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U;kf;d lnL; /Judicial Member ys[kk lnL;@Accountant Member
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fnukad@Dated:- 30 /05/ 2017
*Mishra
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- Shri Harbans Lal Sethi, kota
2. izR;FkhZ@ The Respondent- The Addl. CIT, Range-1, Kota / ACIT,Circle- 1, Kota
3. vk;dj vk;qDr¼vihy½@ CIT(A).
4. vk;dj vk;qDr@ CIT,
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No.495/JP/2013) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar