Income Tax Appellate Tribunal - Pune
Shah Construction, Satara vs Dy. Cit, Satara Range, Satara on 30 December, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
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BEFORE SHRI R.K. PANDA, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.708/PUN/2013
#नधा&रण वष& / Assessment Year : 2007-08
M/s. Shah Construction, .......... अपीलाथ /Appellant
Budhwar Peth,
Karad, Dist. Satara
PAN : AAFFS0461E
बनाम v/s
Addl.CIT, Satara Range, Satara .......... यथ /Respondent
आयकर अपील सं. / ITA No.1146/PUN/2013
#नधा&रण वष& / Assessment Year : 2008-09
Dy.CIT, Satara Circle, Satara .......... अपीलाथ /Appellant
बनाम v/s
M/s. Shah Constructions, .......... यथ /Respondent
Parag Budhwar Peth,
Karad, Dist. Satara
PAN : AAFFS0461E
आयकर अपील सं. / ITA No.1078/PUN/2013
#नधा&रण वष& / Assessment Year : 2008-09
M/s. Shah Construction, .......... अपीलाथ /Appellant
Budhwar Peth,
Karad, Dist. Satara
PAN : AAFFS0461E
बनाम v/s
Dy.CIT, Satara Range, Satara .......... यथ /Respondent
आयकर अपील सं. / ITA No.1079/PUN/2013
#नधा&रण वष& / Assessment Year : 2009-10
M/s. Shah Construction, .......... अपीलाथ /Appellant
Budhwar Peth,
Karad, Dist. Satara
PAN : AAFFS0461E
बनाम v/s
2
ITA Nos.708,1146, 1078 & 1079/PUN/2013
Addl.CIT, Satara Range, Satara .......... यथ /Respondent
Assessee by : Shri M.K. Kulkarni
Revenue by : Shri P.L. Kureel
सुनवाई क तार ख / घोषणा क तार ख /
Date of Hearing :03.11.2016 Date of Pronouncement:30.12.2016
आदे श / ORDER
PER R.K.PANDA, AM :
ITA No.708/PUN/2013 filed by the assessee is directed against the
order dated 30-09-2011 of the CIT(A)-III, Pune relating to Assessment Year 2007-08. ITA No.1078/PUN/2013 filed by the assessee and ITA No.1146/PUN/2013 filed by the Revenue are cross appeals and are directed against the order dated 31-01-2012 of the CIT(A)-III, Pune relating to Assessment Year 2008-09. ITA No.1079/PUN/2013 filed by the assessee is directed against the order dated 11-02-2013 of the CIT(A)-III, Pune relating to Assessment Year 2009-10. For the sake of convenience, all these appeals were heard together and are being disposed of by this common order.
ITA No.708/PUN/2013 (By Assessee) (A.Y. 2007-08) :
2. Grounds of appeal No. 1 to 4 by the assessee relates to the order of the CIT(A) in confirming the addition of Rs.75,24,922/- made by the Assessing Officer u/s.69A of the I.T. Act.
3. Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of Civil Construction. It filed its return of income on 31-10-2007 declaring total income of Rs.25,14,800/-. During the course of assessment proceedings the Assessing Officer observed that the outstanding balance of sundry creditors as on 31-03-2007 was Rs.2,72,51,527/- as against Rs.1,52,53,989/- as on 31-03-2006. The 3 ITA Nos.708,1146, 1078 & 1079/PUN/2013 Assessing Officer on the basis of investigation carried out by him observed that out of the total creditors of Rs.2,72,51,527/- the creditors for labour charges amounted to Rs.63,70,021/- and sundry creditors for materials to the tune of Rs.11,54,901/- are not genuine as the liability shown in the names of these creditors was either fictitious or already discharged by the assessee outside the books of account. The above conclusion by the Assessing Officer was arrived at after indepth investigations by issuing notice u/s.133(6) and/issue of summons u/s.131. It was observed that out of 26 sundry creditors to whom notice u/s.131 and 133(6) were issued, 24 of them did not respond at all. Only 2 creditors responded to notice u/s.131 whose statements were recorded and they have denied to have any outstanding receivable from the assessee. Rejecting the various explanations given by the assessee and observing that the assessee failed to discharge the onus cast on him by proving the genuineness of the creditors the Assessing Officer made addition of Rs.75,74,922/- which comprised of Rs.63,70,021/- on account of sundry creditors for labour charges and an amount of Rs.11,54,901/- on account of sundry creditors for materials. The request of the assessee to estimate the profit was also turned down by the Assessing Officer on the ground that the addition has been made on account of bogus sundry creditors and not by estimating the profit. Relying on the decision of Hon'ble Supreme Court in the case of Kale Khan Mohammad Hanif Vs. CIT reported in 50 ITR 1 where it has been held that sundry creditors can be added despite gross profit estimation the Assessing Officer made addition of Rs.75,24,922/- to the total income of the assessee. While doing so, the Assessing Officer further observed that the assessee's taxable income of Rs.24,14,800/- includes other income of Rs.25,71,023/-. But for the other income the return would have been a loss. If the other income is deducted the net profit obviously would come down drastically. Therefore, the assessee's claim of net profit percentage of around 20% is also incorrect. Accordingly, the Assessing Officer made the 4 ITA Nos.708,1146, 1078 & 1079/PUN/2013 addition of Rs.75,24,922/- to the total income of the assessee on account of bogus sundry creditors.
4. Before CIT(A) it was submitted that the assessee is engaged in execution of contract work and for carrying out such works labour was required to be engaged which was mostly done through labour sardars. The payments to labourers were made generally on the advice of labour sardars who take care of the needs and requirements of the labourers working under them and therefore the labourer could wait for their labour charges when the assessee firm is having liquidity problem. It was argued that the Assessing Officer is framing the assessment order purely on the basis of assumptions and presumptions and without considering the ground realities and without appreciating the reasons for outstanding liability in the name of labour creditors.
5. So far as the creditors for materials are concerned it was argued that the expenditure was incurred for purchase of material and the liability is genuine. It was argued that the accounts of the assessee are duly audited and nothing has been brought on record by the Assessing Officer to indicate that the accounting standards have been violated by the assessee while maintaining the books.
6. It was argued that even though the payments were made by cheque in subsequent year the same were considered as fictitious liability which shows the biased attitude of the Assessing Officer on the whole issue. The assessee also argued that the entire liability towards labour charges amounting to Rs.63,70,021/- which was disallowed by the Assessing Officer as bogus was subjected to TDS by the assessee and tax of Rs.1,28,963/- on total payment/credit of Rs.65,03,691/- was deducted and paid to the Government account and respective TDS returns were also filed. It was argued that even though the principal amount might not have been paid as 5 ITA Nos.708,1146, 1078 & 1079/PUN/2013 on 31-03-2007 for a number of reasons, the income comprised in the TDS amount belonged to the respective parties only as per the provisions of section 199 of the I.T. Act and such income cannot be added u/s.69A of the I.T. Act in the hands of the assessee as has been done by the Assessing Officer. The assessee further argued that the net profit disclosed by the assessee in the current year is around 20% of the receipts which was quite reasonable in this line of business and therefore the addition made by the Assessing Officer is totally unjustified. It was argued that the books of accounts were subjected to tax audit and no discrepancies were pointed out by the auditors and therefore rejection of books of account u/s.145(3) r.w.s. 69A is not warranted. The assessee also argued that the AO failed to prove that cash repayments shown in the creditors accounts had come back to the assessee and the money so returned has been translated into some undisclosed positive wealth. Relying on various decisions it was argued that when the income did not materialise at all there was no real income which can be taxed. It was argued that the real income applied to income tax proceedings and computation of income therein and what is to be taxed is the real income.
7. However, the CIT(A) was also not satisfied with the explanation given by the assessee and upheld the addition made by the Assessing Officer by summarizing his observations which read as under :
"3.3.9 To sum up, the liability of Rs. 75,24,922/- shown as outstanding as on 31.03.2007 in the books of account of the appellant is either fictitious or it was discharged outside the books of a/c but shown as outstanding In the books of a/c. The credit balances shown as outstanding were squared up in the subsequent year mostly with cash repayments when the cash balance had improved in the books of a/c. Since the amounts were mostly squared up by showing cash repayments, the claim of the appellant that liability was genuine is not amenable to Independent verification. The Assessing Officer did make an effort to examine the parties concerned but there was no response to the summons issued in case of 24 parties and in two cases where there was compliance, parties have categorically stated that no amount was due from the appellant as on 31.03.2007. The appellant, except filing self-serving affidavits, has not made any 6 ITA Nos.708,1146, 1078 & 1079/PUN/2013 attempt to produce the parties for examination nor did the appellant produce any cogent material and credible evidence to prove the genuineness of the creditors and the liability. It is normal practice in the contract business that the laborers or their sardars are paid lump sum amount in advance and the account is settled once the work assigned to them is completed and the bills raised, which is done either on dally basis or on weekly basis. It is inconceivable that the labor, who leads hand to mouth existence, would have waited for such a long time to receive wages from the appellant directly or through labor sardars. The liability shown in balance sheet in case of 'labor charges' is not a small amount but constitutes sizable percentage of the total expenditure debited to the profit & loss account under this head. In these circumstances, the Assessing Officer is justified in coming to the conclusion that the impugned liability shown as outstanding as on 31.03.2007 in the books of account of the appellant is either fictitious or it was already discharged outside the books of a/c. The conclusions/observations drawn by the Assessing Officer regarding genuineness of the said liability are not based on assumptions and presumptions. The well reasoned conclusions are based on the detailed examination of each and every creditor in question and the failure of the appellant to prove the genuineness of the liability satisfactorily.
3.3.10 For the foregoing reasons, I am of the considered opinion that the Assessing Officer is justified in treating the liability to the extent of Rs.75,24,922/- shown as outstanding in the books of a/c of the appellant as not genuine and adding the amount to the income returned. Accordingly, the addition of Rs.75,24,922/- made on this ground is upheld."
8. Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
9. The Ld. Counsel for the assessee submitted that the Assessing Officer after invoking the provisions of section 145(3) made addition on account of bogus liability shown under the head creditors. He submitted that once the books are rejected no separate addition on account of sundry creditors could have been made. The Ld. Counsel for the assessee submitted that as against total contract receipt of Rs.11,56,59,762/- the assessee has shown gross profit of Rs.2,93,10,248/- and net profit of Rs.1,88,94,211/-. He submitted that if the addition made by the Assessing Officer and upheld by the CIT(A) is sustained, then the net profit comes to 22.84% which is not possible in this line of business especially in 7 ITA Nos.708,1146, 1078 & 1079/PUN/2013 Government contract. He accordingly submitted that the addition made by the Assessing Officer and upheld by the CIT(A) should be deleted.
10. The Ld. Departmental Representative on the other hand submitted that assessee has shown bogus creditors in its books of account which he could not explain properly. Despite number of opportunities given by the Assessing Officer to produce these creditors when they did not respond to the summons issued u/s.131 the assessee also failed. The persons shown as sundry creditors did not have the capacity to extend such huge credit to the assessee. Under these circumstances the CIT(A) was fully justified in sustaining the addition made by the Assessing Officer. He accordingly submitted that the order passed by the CIT(A) should be upheld.
11. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. An analysis of the profit and loss account a copy of which is placed at page 40 of the paper book, shows the following results :
Net profit transferred to partners as per profit and loss account : 18,83,498 Add :
Loss from windmill debited : 1,70,10,713/-
Salary to partners : 4,08,000/-
Interest to partners : 32,56,201/-
Depreciation : 8,94,266/-
-----------------------
Total : Rs.2,34,52,678/-
Less :
Other income credited to the profit
and loss account
Interest on FD : 18,86,502/-
Dividend : 61/-
Flat Rent : 3,78,000/-
IT Refund : 2,96,351/-
Interest on IT Refund : 10,110/-
-----------------------
Rs.25,71,024/-
-----------------------
Profit from contract work : Rs.2,08,81,654/-
-----------------------
8
ITA Nos.708,1146, 1078 & 1079/PUN/2013
12. Thus as against the contract receipt of Rs.11,56,59,762/- the net profit before depreciation and salary and interest to partners comes to 18.05%. It is an admitted fact that the Assessing Officer has rejected book results u/s.145(3) and went for addition on account of sundry creditors. We find the CIT(A) while upholding the addition made by the Assessing Officer on this account has rejected the submission of the assessee that in subsequent years some of the payments have been made by cheque to these creditors. There is no evidence on record that the payments made subsequently to the sundry creditors has come back to the assessee by someway or the other. It is also an admitted fact that the assessee has deducted TDS on the labour charges and the TDS returns have been duly filed, a fact stated before CIT(A) and not controverted by the revenue. At the same time, the assessee also failed to produce the creditors on account of outstanding labour charges or sundry creditors for supply of materials before the Assessing Officer when the summons issued to them were returned back and the assessee was given opportunity by the Assessing Officer to produce those creditors. Under these circumstances and considering the totality of the facts of the case, we are of the considered opinion that adoption of profit rate of 20% on the turnover of Rs.11,56,59,762/- before depreciation, salary and interest to partners will meet the ends of justice. This amounts to an addition of Rs.22,55,365/-, i.e. addition of additional income @ 1.95% (i.e. 20% - 18.05%) on turnover of Rs.11,56,59,762/- We hold and direct accordingly. Grounds raised by the assessee are accordingly partly allowed.
13. In ground of appeal No.5 the assessee has challenged the order of the CIT(A) in confirming the disallowance of Rs.1,98,769/- made by the Assessing Officer by invoking the provisions of section 40(a)(ia) of the I.T. Act.9
ITA Nos.708,1146, 1078 & 1079/PUN/2013
14. Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed that the assessee has debited an amount of Rs.4,96,922/- as interest to Sambhavnath Nagari Sahakari Patsanstha on which tax at source was not deducted as per the provisions of section 194A of the I.T. Act. Therefore, the assessee has violated the provisions of section 40(a)(ia) of the I.T. Act. He, therefore, asked the assessee to explain as to why the said expenditure should not be disallowed. It was explained by the assessee that since no amount is payable at the end of the year, therefore, the provisions of section 40(a)(ia) is not applicable. However, the Assessing Officer rejected the above explanation of the assessee. He further observed that the cooperative societies to which interest has been paid by the assessee, are credit cooperative societies and also the societies are providing facilities to members as consumer cooperative societies. The Cooperative societies are not empowered under the RBI to issue any cheque to its members. In other words, these are not provided with the various banking facilities as they are not guided by the Banking Regulation Act and the norms and guidelines provided by the RBI for running of banking business. Therefore, these cooperative societies cannot be equated with a bank so that any transactions pertaining to section 194A as done with the cooperative societies could be provided the safeguard as given in the case of a bank carrying on banking business. He, therefore, invoking the provisions of section 40(a)(ia) held that the entire amount of Rs.4,96,922/- is required to be disallowed. He however observed that the loan taken by the assessee was utilized for acquiring the windmill and the assessee had capitalized the said interest and added the same to the cost of windmill. The assessee has claimed 40% depreciation on the same. He, therefore, restricted the disallowance u/s.40(a)(ia) to Rs.1,98,762/- being 40% of Rs.4,96,922/-. 10
ITA Nos.708,1146, 1078 & 1079/PUN/2013
15. In appeal the Ld.CIT(A) upheld the action of the Assessing Officer. Aggrieved with such order of the CIT(A) the assessee is in appeal before us.
16. The Ld. Counsel for the assessee made two fold arguments. The first plank of his argument is that once the books are rejected no separate addition on account of section 40(a)(ia) can be made. In his second plank of argument he submitted that the interest has been paid to a cooperative society whose income is exempt. Therefore, there cannot be any disallowance u/s.40(a)(ia) of the I.T. Act. He also relied on the following decisions :
1. Indwell Constructions Vs. CIT reported in 232 ITR 776 (AP)
2. Teja Constructions Vs. ACIT reported in (2010) DTR (Hyd) (Trib.)
3. ITO Vs. Nardev Kumar Gupta reported in (2013) 32 taxmann.com 388 (jaipur-Trib.)
4. Maddi Sudarsanam Oil Mills Co. Vs. CIT reported in 37 ITR 0369 (AP)
17. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A).
18. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find due to non-deduction of tax at source on the payment of interest of Rs.4,96,922/- the Assessing Officer held that assessee has violated the provisions of section 40(a)(ia) of the I.T. Act. He however restricted the disallowance to Rs.1,98,769/- since such interest on loan was capitalised for windmill and the assessee has claimed depreciation @40% on such windmill. We find in appeal the Ld.CIT(A) upheld the disallowance made by the Assessing Officer.
11
ITA Nos.708,1146, 1078 & 1079/PUN/2013
19. It is the submission of the Ld. Counsel for the assessee that once the books of accounts are rejected u/s.145(3) then in that case no separate disallowance is called for. It is his alternate submission that since the cooperative society to whom the interest has been paid is exempt from tax, therefore, the assessee is not required to deduct tax at source. We find the first argument of the Ld. Counsel for the assessee is more acceptable. In the preceding paragraphs we have decided the appeal of the assessee by estimating the profit on income from contract receipt. In our opinion, once the profit of an assessee is estimated by rejecting the book results then all other disallowance are taken care of and no separate addition on account of 40(a)(ia) or 40A(3) can be made.
20. The Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions (supra) has held that separate addition in respect of items falling u/s.40(b) cannot be made to the income estimated u/s.145 after rejecting books of account as all the deductions including disallowance u/s.40(b) which are referred to in section 29 are deemed to have been taken into account while making estimate. The Hyderabad Bench of the Tribunal in the case of Teja Constructions (supra) has held that once estimation of income is made further disallowance u/s.40(a)(ia) for non deduction of TDS is not warranted.
21. Since in the instant case we have already directed the Assessing Officer go for estimation of profit from contract work, therefore, further disallowance u/s.40(a)(ia) in the instant case is not called for. We, therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs.1,98,769/- made by him by invoking the provisions of section 40(a)(ia) of the I.T. Act. The ground raised by the assessee is accordingly allowed.
12
ITA Nos.708,1146, 1078 & 1079/PUN/2013
22. In ground of appeal No.6 the assessee has challenged the order of the CIT(A) in confirming the disallowance at 27,860/- made by the Assessing Officer u/s.40A(3) of the I.T. Act.
23. After hearing both the sides, we find the Assessing Officer made disallowance of Rs.27,860/- u/s.40A(3) being 20% of Rs.1,39,290/- paid by the assessee to one Tushar Transport on 3 occasions where the payment on each occasion has exceeded Rs.20,000/-. We find in appeal the Ld.CIT(A) upheld the action of the Assessing Officer on the ground that the assessee failed to establish that the payments by cash were made under exceptional or unavoidable circumstances or out of business compulsions or that the payments are covered by any of the exceptions provided in Rule 6DD. It is the submission of the Ld. Counsel for the assessee that once the books are rejected u/s.145(3) then no disallowance u/s.40A(3) is called for.
24. We find merit in the above submission. As mentioned in the preceding paragraphs, we have already held that no separate disallowance on account of section 40(a)(ia) or 40A(3) is called for once the profit is estimated. Since we have already held that the profit of the assessee in the instant case has to be estimated, therefore, there is no justification for any addition on account of violation of section 40A(3). Accordingly, the order of the CIT(A) is set aside and the ground raised by the assessee has been allowed.
25. Ground of appeal No.7 relates to levy of interest u/s.234A, 234B and 234C.
26. After hearing both the sides, we are of the considered opinion that levy of interest under the above provisions are mandatory and consequential in nature, therefore, this ground by the assessee is dismissed.
13
ITA Nos.708,1146, 1078 & 1079/PUN/2013 ITA No.1078/PUN/2013 (By Assessee) (A.Y. 2008-09) : ITA No.1146/PN/2013 (By Revenue) (A.Y. 2008-09) :
27. Grounds of appeal No.1 and 2 by the Assessee and all the grounds raised by the revenue relate to the part relief given by the CIT(A) by sustaining the addition of Rs.29,26,768/- as against Rs.90 lakhs made by the Assessing Officer on account of decline in GP in construction work.
28. Facts of the case, in brief, are that the assessee filed return of income on 30-09-2008 declaring total income of Rs.1,73,780/-. During the course of assessment proceedings the Assessing Officer observed that the gross profit declared by the assessee is 18.87% as against 25.34% in the preceding year even though the turnover in the preceding year was less than that of the turnover during this year. He, therefore, asked the assessee to explain as to what are the factors led to such reduction in gross profit yield. The assessee substantiated the reasons for fall in GP for the following reasons which has been summarised by the Assessing Officer at para 7.2 of his order and which read as under :
"1. There is no fall in the GP if compared to earlier four years, except A.Y.2007-08, which was exceptional year with 25.34% GP due to various reasons.
2. The work in the current year is material intensive (instead of being labour intensive).
3. Major work done during the year was mainly in hilly area and at remote placed and two sites were at places where labour was unwilling to work.
4. There was heavy interference by the local political leaders which resulted in delay in work completion.
5. The rate in power projects in private sector are very competitive.
6. The work in respect of one site in Dist. Nagpur was 900 kms away from head office and there were many restrictions while doing the work."
29. However, the Assessing Officer was not satisfied with the explanation given by the assessee for the following reasons :
14
ITA Nos.708,1146, 1078 & 1079/PUN/2013 "1. The explanations given above are very general and vague in nature.
2. None of the reasons given are supported by any specific documentary evidence.
3. The assessee has not maintained site-wise accounts and records as admitted by the assessee. Therefore, claiming the decline in profit on the basis of particular site work is nothing but an after-thought.
4. The assessee is in the same business for the last several years.
Therefore, the plea taken about competitive rates, difficult sites, etc. are the factors which will be definitely taken into consideration by the assessee before submitting the tenders and quoting the rates.
5. The reasons given for increase in expenditure like delay in work blamed on difficult working conditions and political interference, mainly indicates that the assessee has no valid reasons to justify the low gross profit and net profit shown in the return of income,
6. The assessee was repeatedly given opportunities to explain the factors leading to the abnormal reduction in its gross profit yield in the questionnaire issued to the assessee dated 31-10-2010 itself the assessee was requested to "furnish supporting evidences in regard to the contentions which the assessee was going to putforth". Thus, it was made clear to the assessee well in advance that the reasons given by it should be supported by proper documentary evidence.
7. The reasons given for fall in net profit are also similarly vague and without any supporting evidences. It is specifically to be noted that assessee has not purchased any new windmill during F.Y.2 007-08, therefore, the fall in NP cannot be blamed on the increased depreciation of windmill.
Under these circumstances, it has to be presumed that the assessee has no justifiable explanation to offer in this regard and it is required to examine the issue in the light of the information available in record."
30. Rejecting the various explanations given by the assessee the Assessing Officer enhanced the GP ratio of the assessee by an additional 5% profit and accordingly made addition of Rs.90 lakhs to the total income of the assessee.
31. Before CIT(A) the assessee challenged the action of the Assessing Officer in rejecting the book results and enhancing the gross profit by 5%. It was argued that the estimation of GP of additional 5% by the Assessing Officer was uncalled for under the facts and circumstances of the case. 15
ITA Nos.708,1146, 1078 & 1079/PUN/2013
32. In appeal the Ld.CIT(A) while upholding the rejection of book results and estimation of gross profit on the contract receipt, however observed that the assessee has been supplied materials to the tune of Rs.2,01,75,901/- on which there cannot be any profit element. Referring to the decision of Hon'ble Supreme Court in the case of CIT Vs. Brij Bhushan Lal Ramesh Kumar reported in 115 ITR 524 where it has been held that no element of profit was involved in the turnover represented by the cost of stores/material supplied by the MES to the assessee firm, the income or profits derived by the assessee firm from such contracts would have to be determined on the basis of the value of the contracts exclusive of the cost of the materials/stores received for being used, fixed or incorporated in the works undertaken by them. He accordingly directed the Assessing Officer to restrict the GP rate to 20.5% as against GP of 18.83% disclosed by the assessee for this year. He accordingly restricted the addition to Rs.29,26,768/- as against Rs.90 lakhs made by the Assessing Officer.
33. Aggrieved with such order of the CIT(A) both the assessee as well as the revenue are in appeal before us.
34. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find as against the total contract receipt of Rs.18,02,57,518/- the Government has supplied materials to the tune of Rs.2,01,75,901/- to the assessee. It is the settled proposition of law that when the material is supplied by the Government Department for utilisation in the construction work, then the profit has to be estimated on the gross contract receipt as reduced by the cost of materials so supplied by the Government Department as the assessee is not expected to make any profit out of it. Under these circumstances the gross profit has to be computed after reducing the cost of materials supplied from the gross 16 ITA Nos.708,1146, 1078 & 1079/PUN/2013 contract receipts which the CIT(A) in the instant case has done. We find the Ld.CIT(A) while restricting the addition to Rs.29,26,768/- has observed as under :
"2.3.5 Now the issue that remains for consideration is about the quantum of estimation and the resultant addition made in the assessment order. The Assessing Officer has made the addition of Rs.90,00,000/- by adopting GP rate at 5% over the gross profit disclosed by the appellant for this year. In other words, Assessing Officer estimated the gross profit at 23.87% (18.87+5) of the turnover as against 18.87% shown by the appellant. The estimation of gross profit was done by the Assessing Officer by taking into consideration the exceptional gross profit of 25.34% shown for the A.Y. 2007-08 and stating that there are general 'grey areas'. But what is the extent of these grey years and their impact on the profitability are not spelt out in the assessment order nor did the Assessing Officer bring any material on record like comparable cases etc. to support his observation and estimation of gross profit at 23.87%. While doing so, the Assessing Officer has also glossed over the fact that the value of the material supplied by the contractee Department was Rs.2,01,75,901/- as against the Rs.2,23,071/- in the immediately preceding year which also affects the profitability in this line of business, though not to the extent claimed by the appellant. In fact, the Apex Court in the case of CIT Vs. Brij Bhushan Lal Ramesh (115 ITR 524) observed that since no element of profit was involved in the turnover represented by the cost of stores/material supplied by the M.E.S. to the assessee-firm, the income or profits derived by the assessee firm from such contracts would have to be determined on the basis of the value of the contracts exclusive of the cost of the material/stores received for being used, fixed or incorporated in the works undertaken by them. After taking into consideration the explanation furnished by the appellant for the decline in the gross profit in this year, the profit ratios declared in the earlier years, the nature of business being carried on by the appellant, i.e. execution of contract works which include works at remote places and also substantial increase in the material supplied by the contractee Department in this year, it is considered fair and reasonable to adopt the G.P. rate at 20.5% per cent for the year under appeal (which is worked out by taking average of G.P. declared for the last three years, i.e. from A.Y. 2005-06 to A.Y. 2007-08) as against G.P. of 18.83% disclosed by the appellant for this year. Accordingly, the gross profit for this year works out to Rs.3,69,52,790/- as against gross profit disclosed by the appellant at Rs.3,40,26,023/-. Thus, the addition on this ground will be restricted to Rs.29,26,768/- (3,69,52,790- 3,40,26,023). The appellant gets consequential relief of Rs.60,73,232/- (Rs.90,00,000 - 29,26,768)."
35. The decision of the CIT(A) in the instant case in our opinion is a reasoned one. Neither the Ld. Departmental Representative nor the Ld. Counsel for the assessee could point out any mistake in the order of the 17 ITA Nos.708,1146, 1078 & 1079/PUN/2013 CIT(A). Accordingly, the grounds raised by the Revenue and grounds of appeal No.1 and 2 by the assessee are dismissed.
36. In Ground of appeal No.3 the assessee has challenged the order of the CIT(A) in sustaining the disallowance of Rs.2,29,490/- made by the Assessing Officer invoking section 40(a)(ia) of the I.T. Act.
37. After hearing both the sides, we find the above ground by the assessee is identical to ground of appeal No.5 in ITA No.708/Pun/2013. We have already decided the issue and the ground raised by the assessee has been allowed. Following the same reasonings, this ground by the assessee is allowed.
38. Ground of appeal No.4 by the assessee reads as under :
"4. On the facts and circumstances of the case and in law the Ld.CIT(A) was not justified in confirming the percentage of depreciation @10% on WDV of Civil work worked out by AO on windmill. In view of Hon'ble Pune ITAT judgment in the case of Dy.CIT Vs. Aminity Developers & Builders in ITA.1505/PN/2011 for A.Y. 2008-09 decided on 12th December 2012, wherein it has been held that the cost of the foundation of windmill is eligible for depreciation at the rate of 80% or the rate which is applicable to the windmill as it is integral part of cost of windmill erection. The depreciation be allowed accordingly."
39. After hearing both the sides, we find the Assessing Officer during the course of assessment proceedings observed that the assessee has claimed depreciation on windmill @80%. According to the Assessing Officer similar claim made by the assessee for various components of windmill in the immediately preceding assessment year was restricted by the Assessing Officer after elaborately discussing the various aspects of the issue in assessment order for that year. Following the same reasonings for this year the Assessing Officer restricted the claim of depreciation on windmill in the current year also and accordingly reduced the cost of claim of depreciation to the extent of Rs.17,19,000/-, the details of which are as under : 18
ITA Nos.708,1146, 1078 & 1079/PUN/2013 Asset Opening Additions Depreciation Admissible Closing WDV during Deprn. WDV the year Windmill 2,27,49,505 - 80% 1,81,99,604 45,49,901 Foundation 23,40,000 - 10% 2,34,000 21,06,000 cost Erection & 17,00,000 - 15% 2,55,000 14,45,000 Commissioning Total 2,67,89,505 - 1,86,88,604 81,00,901
40. In appeal the Ld.CIT(A) directed the Assessing Officer to allow depreciation @80% in respect of erection and commissioning charges of Rs.12 lakhs. Thus, he directed the Assessing Officer to work out the depreciation of Rs.9,60,000/- as against Rs.2,55,000/- allowed by the Assessing Officer in respect of erection and commissioning charges. However, as regards the foundation cost is involved, he upheld the action of the Assessing Officer in applying the rate of depreciation of 10%.
41. The Ld. Counsel for the assessee at the outset filed a copy of the order of Tribunal in the case of ACIT Vs. Sonai Engineering Pvt. Ltd. and vice versa vide ITA Nos. 1078/PN/2012 and 2157/PN/2012 order dated 27- 08-2014 and submitted that the Tribunal in the said decision following the decision of the Tribunal in the case of DCIT Vs. Aminity Developers and Builders (supra) upheld the order of the CIT(A) and held that foundation of windmill is a part of windmill eligible for depreciation @80%.
42. The Ld. Departmental Representative on the other hand supported the order of the CIT(A).
43. After hearing both the sides, we find the CIT(A) upheld the action of the Assessing Officer in confirming depreciation @10% on the civil construction of the windmill. In the case of Sonai Engineering Pvt. Ltd. (supra) we have upheld the order of the CIT(A) in holding that cost of work including foundation work is a part of the new windmill and eligible for depreciation at higher rate. We therefore set aside the order of the CIT(A) and direct the Assessing Officer to compute the depreciation @80% or the 19 ITA Nos.708,1146, 1078 & 1079/PUN/2013 rate which is applicable to the windmill since such civil construction is an integral part of the cost of windmill erection . Grounds raised by the assessee is accordingly allowed.
44. The Ld. Counsel for the assessee did not press ground of appeal No.5 for which the Ld. Departmental Representative has no objection. Accordingly, the same is dismissed.
45. Ground of appeal No.6 relates to levy of interest u/s.234A, 234B and 234C which are mandatory and consequential in nature and therefore the same is dismissed.
46. Ground of appeal No.7 being general in nature is dismissed. ITA No.1079/PUN/2013 (By Assessee) (A.Y. 2009-10) :
47. Grounds of appeal No.1 to 3 by the assessee relates to the order of CIT(A) in confirming GP estimation made by the Assessing Officer at 17.60% and thereby sustaining the addition of Rs.68,83,535/-made by the Assessing Officer.
48. Facts of the case, in brief, are that the assessee filed its return of income on 27-09-2009 declaring total income of Rs.1,95,63,680/-. During the course of assessment proceedings the Assessing Officer observed that the GP for the year under consideration stood at Rs.3,50,77,255/- being 14.72% on a total contract receipt of Rs.23.83 crores. From the details furnished before him he compared the percentage of GP for the current year as well as the preceding years which are as under :
Particulars Assessment Year
2005-06 2006-07 2007-08 2008-09 2009-10
Contract 7,64,17,231 10,01,15,735 11,56,59,762 18,02,57,518 23,83,32,619
Receipts
Gross Profit 1,45,57,725 1,73,51,024 2,93,10,248 3,40,26,023 3,50,77,225
GP% 19.05 17.33 25.34 18.88 14.72
20
ITA Nos.708,1146, 1078 & 1079/PUN/2013
Observing that there was decline in the GP ratio in this year as compared to the preceding assessment years the Assessing Officer asked the assessee to justify the reasons for such fall in the GP rate. The assessee while justifying the fall in profit ratio gave the following reasons :
"1. The work in the current year is more material intensive (instead of being labour intensive) and there was substantial rise in the cost of the main raw material. In material intensive work, profits margin are empirically lower labour intensive work.
2. Major work done during the year was mainly at remote places at Wardha, Khaparkheda, Nagpur and Bhusaval and increase in distance from HO leads to lesser control of costs.
3. There was heavy interference by the local political leaders, who insisted to appoint local people for the work allotted, which resulted in delay in work completion.
4. Progress of works at Ghatewadi, in patan was affected by heavy rains and due to the unforeseen nature's act; work came to standstill for over four months.
5. Similarly, work at Panhala had to be stopped due to objections raised by Archaelogical Survey of India."
49. However, the Assessing Officer was not fully satisfied with the explanation given by the assessee and observed that the reasons given by the assessee are very vague and without any supporting evidence. He has not maintained any site-wise accounts and records. Therefore, claiming the decline in the profit on the basis of a particular site working is nothing but an afterthought. Since the assessee is in the same business for the other several years, therefore, the plea about the competitive rates, difficult sites etc. must have been taken into consideration while submitting tenders and quoting the rates The Assessing Officer further observed that the various other reasons given by the assessee were also not substantiated. Despite repeated opportunities given to explain the factors that led to the abnormal reduction in its GP yield the assessee only repeated the same arguments without justifying the same. The Assessing Officer therefore rejecting the various explanations given by the assessee adopted the GP rate of 17.68% and made addition of Rs.68,69,285/- to the total income of the assessee. 21
ITA Nos.708,1146, 1078 & 1079/PUN/2013 While adopting rate of 17.60% he observed that the average of the GP rate from A.Y. 2005-06 onwards comes to 19.06% whereas the GP rate for the year is 14.72%. Thus, there is a difference of 4.34%. Taking into account the exceptional and extraordinary circumstances the Assessing Officer accordingly allowed a margin of 1.50% and made addition of Rs.60,69,785/- to the total GP by adopting the GP rate of 17.60%.
50. In appeal the Ld.CIT(A) while upholding the rejection of book results made by the Assessing Officer upheld the GP rate of 17.60% adopted by the Assessing Officer and thereby sustained the addition of Rs.68,69,285/-.
51. Aggrieved with such order of CIT(A) the assessee is in appeal before us.
52. After hearing both the sides, we do not find any infirmity in the order of the CIT(A). Admittedly, the GP rate adopted by the assessee at 14.71% for the impugned assessment year is very less as compared to the preceding assessment years. The Assessing Officer has already considered average of the GP rate for the last 5 years which comes to 19.06%. Thus, the difference between the average rate of past years and the rate of GP for the current year was 4.34% out of which the Assessing Officer has already gave margin of 1.50% on account of exceptional circumstances and thereby made GP addition of only 2.84%. We further find during the year there is also no supply of material by the Government Department whereas such supply of material was there in the preceding year to the tune of Rs.2.20 crores. The assessee has not substantially proved how the work is more material intensive and heavy interference by the local political leaders. Under these circumstances, we fail to understand as to how the order of the CIT(A) is erroneous while confirming the order of the Assessing Officer. The Ld. Counsel for the assessee could not bring any cogent evidence so as to take a contrary view than the view taken by the CIT(A). Accordingly, 22 ITA Nos.708,1146, 1078 & 1079/PUN/2013 we uphold the order of the order of CIT(A) on this issue. Grounds of appeal No.1 to 3 by the assessee are dismissed.
53. In ground of appeal No.4 the assessee has challenged the order of CIT(A) in confirming the percentage of depreciation @10% on WDV on civil work on windmill.
54. After hearing both the sides, we find the above ground is identical to ground of appeal No.4 in ITA No.1078/PUN/2013. We have already decided the issue and the ground raised by the assessee has been allowed. Following the same reasoning this ground by the assessee is allowed.
55. Ground of appeal No.5 relates levy of interest u/s.234A, 234B and 234C. Since charging of interest under the above provisions are mandatory and consequential in nature, therefore, the above ground by the assessee is dismissed.
56. Ground of appeal No.6 by the assessee being general in nature is dismissed.
57. In the result, all the appeals filed by the assessee are partly allowed and the appeal filed by the Revenue is dismissed.
Pronounced in the open court on 30-12-2016.
Sd/- Sd/-
(VIKAS AWASTHY) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
पण
ु े Pune; दनांक Dated : 30 December, 2016.
th
सतीश
23
ITA Nos.708,1146, 1078 & 1079/PUN/2013
आदे श क) *#त,ल!प अ-े!षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. The CIT(A)-III, Pune
4. CIT-III, Pune
5. "वभागीय $त$न)ध, आयकर अपील य अ)धकरण, "B Bench" पुणे / DR, ITAT, "B Bench" Pune;
6. गाड1 फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, //स या"पत $त / True Copy// // True Copy // व%र&ठ $नजी स)चव / Sr. Private Secretary आयकर अपील य अ)धकरण, पुणे / ITAT, Pune