Income Tax Appellate Tribunal - Jodhpur
M/S Satish Kumar & Company, Hanumangarh vs Acit Circle -1, Acit Circle-1 Bikaner on 11 March, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
JODHPUR BENCH, JODHPUR(DB).
BEFORE: DR. S. SEETHALAKSHMI, JJUDICIAL MEMBER &
SHRI RATHOD KAMLESH JAYANTBHAI, ACCOUNTANT MEMBER
I.T.A. No.197/Jodh/2023
Assessment Year: 2014-15
M/s Satish Kumar & Company Vs. ACIT
Gali No. 12, Rawatsar Raod Circle-1,
New Abadi Hanumangarh. Bikaner
[PAN: AAEFS5582M] (Respondent)
(Appellant)
Appellant by Sh.S.L.Jain, Adv.
SH. P.M. Chopra, Adv.
Respondent by Ms. Nidhi Nair, Sr.-DR
Date of Hearing 31.01.2024
Date of Pronouncement 11.03.2024
ORDER
Per:DR. S. Seethalakshmi, JM:
This appeal filed by assessee is arising out of the order of the learned Commissioner of Income Tax (Appeals)-2, Udaipur dated 19.03.2023 [here in after "ld.CIT(A)"] for assessment year 2014-15, which in turn arise from the order dated 26.12.2016 passed under section 143(3)of the Income Tax Act, 1961 (here in after "Act") by the ACIT, Circle-1, Bikaner.
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 2
2.1 At the outset of hearing, the Bench observed that there is delay of 02 days in filing of the appeal by the assessee for which the ld. AR of the assessee filed an affidavit for condonation of delay with following affidavit:-
"I Sandeep Kumar Bansal S/o Nathu Ram Bansal, aged about 54 years, partner of M/s Satish Kumar & Co., Gali No. 12, Rawatsar Road, Nai Abadi, Hanumangarh Town, Hanumangarh-355513 do hereby declar as follows:-
1. That I am the partner of M/s Satish Kumar & Co. Gali No. 12, Rawatsar Road, Nai Abadi, Hanumangarh Town, Hanumangarh-355513.
2. That my firm's PAN No. Is AAEFS5582M.
3. That I have filed my appeal on 25.05.2023 (date) but due to technical error on website it was late by two days.
That due to technical error on site taxpayer was unable to submit the appeal on time. So please accept condonation of the delay and enter the appeal. "
2.2 The ld. AR of the assessee appearing in this appeal submitted that the assessee is serious on the duties and the delay of 02 days is on account of the technical glitches resulted delay.Considering the various judicial precedent where in the courts has considered the explanation prevented the assessee and thereby ignored the delay on account of the technicality of the reasons. Even the apex court in the case of Collector, Land & Acquisition Vs. Mst. Katiji& Others 167 ITR 471(SC) directed the other courts to consider the liber approach in deciding the petition for condonation as the assessee is not going to achieve any benefit for the delay in fact the assessee is at risk.
2.3. During the course of hearing, the ld. DR objected to assessee's application for condonation of delay and prayed that Court may decide the issue as deem fit and proper in the interest of justice.
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 3 2.4 We have heard both the parties and perused the materials available on record. The Bench Noted that the assessee for condonation of delay of 02 days has merit and we concur with the submission of the assessee. Thus, the delay of 02 days in filing the appeal by the assessee is condoned in view of the decision of Hon'ble Supreme Court in the case of Collector, land Acquisition vs. Mst.
Katiji and Others, 167 ITR 471 (SC) as the assessee is prevented by sufficient cause.
3. In this appeal, the assessee has raised following grounds: -
"1. That on the facts and in the circumstances of the case, the Learned CIT (A), Udaipur- 2,has erred in upholding the application of provisions of section 145(3) of the Income Tax Act, 1961.
2. That on the facts and in the circumstances of the case, the Learned CIT (A) has erred insustaining a total addition of Rs. 500648 (1% of amount paid in cash + Interest onIncome Tax Refund).
3. That on the facts and in the circumstances of the case, the Learned CIT (A) has erred in making the addition because it is against the legal position and natural justice.
4. Without prejudice to the above and in the alternative:
i) That it is wrong on the part of the Learned CIT (A) to uphold provisions of section 145(3) of the Income Tax Act, 1961, despite agreeing to the fact that the petitioner has shown better N.P. than earlier years.
ii) That looking at the nature of work, the N.P. Rate applied by Learned CIT (A) is wrong because it is a well settled law that in a case where the provisions of section 145(3) are invoked, one has to consider the past history of the assessee and hence, this addition shall be deleted.
iii) That it is wrong on the part of the Learned CIT(A) to uphold provisions of section 145(3) of the Income Tax Act, 1961, on the basis of non-maintenance of daily records and absence of proper vouchers because the expenditures claimed are fully and properly vouched and the books of appellant are subject to Audit.
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 4 Moreover, no objection has ever been raised by the Auditor regarding improper claim of expenditures.
iv) That it is wrong on the part of the Learned CIT (A) to make an addition of Rs. 100510 while stating that the Interest Income received from Income Tax Refund shall be treated as Income from Other Sources and not be as Business Income despite the fact that the petitioner has already considered this income under the head of Income from Business or Profession.
5. That on the facts and in the circumstances of the case, the authorities below have erred in charging Interest under section 234A and 234B of the Income Tax Act, 1961.
6. That the petitioner may kindly be permitted to raise any additional and/or alternative ground at or before the hearing of Appeal.
7. The petitioner prays for Justice and Relief."
4. Brief facts of the case are that the assessee M/s Satish Kumar & Company Nai Aabadi, Hanumangarh Town is a partnership firm having 7 partners and carrying on business of civil construction with government and semi government departments agencies. During the relevant year, the assessee has executed works obtained from Central state Farm, Nagarpalika, PWD, RSRDC, Rajasthan Agricultural Marketing Board (Bikaner, Hanumangarh), etc. The assessee filed return showing total income of Rs. 28,37,470/- on 01.10.2014, which was processed u/s 143(1). The case was selected for scrutiny assessment, therefore, a notice u/s 143(2) of the Act was issued by the ld. AO on 31.08.2015 which was duly served upon the assessee.
4.1 During the assessment proceeding the ld. AO found that no day to day stock register in respect of material consumption register for various sites was I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 5 maintained by the assessee. In absence of stock register valuation of opening and closing stock can also not be tallied. The ld. AO also noted that no proper voucher / bill etc. for wages & labour expenses, expenses incurred towards purchase of raw material were there. Only Kaccha bill or self made vouchers were maintained by the assessee. Most of these payments were made in cash, which is also not open for verification. Therefore, books of accounts of the assessee rejected u/s. 145(3) of the Act by the ld. AO relying on the decision of ACIT 15(2) vs. Mahesh Enterprises (2013) 38 taxmann.com 249 (Mumbai-
Trib.), Sage Infrastructure (P.) Ltd. Vs. Assistance Commissioner of Income Tax (2013) 37 taxmann.com 32 (Gujarat H.C.) & CIT vs. British Paints India Ltd. 188 ITR 44 (S.C).
4.2 The ld. AO although noted that the assessee has increased with turnover as expected from economies of scale and turnover has increased from the previous year. He also noted that estimation of net profit entails an element of subjectivity as the possibility of finding an exact match either in terms of a comparable entity or in terms of the entity's own results in previous years - as facts of the case change. Further, especially when the entity's books suffer from the same defects year after year, then it is to be noted that the past history of the assessee cannot be the basis of estimation of it s Net Profit as in none of the previous years the accounts of the assessee have been found to be acceptable on I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 6 account of serious defects. In normal course of business, no business man can decide whether the projects undertaken by it are profitable or not in absence of maintenance of site wise/project wise expenses. Hence, the excuse that the site wise books of accounts are not maintained is seen to be unimaginable. Further, in view of the fact that more than 70% of the claimed expenses are unverifiable, and the same pattern has been followed in previous years, hence the previous years results are also not a reliable estimate. In this regard the result of the High Court of Rajasthan, Jodhpur Bench in the case of CIT vs Bhawan and Path Nirman (2003) 127 Taxmen 467 is considered relevant where the court held that a net profit rate of 10% is suitable estimate of the net profit of the civil contractor subject to the allowance in respect of Remuneration, Interest to partners and depreciation. The NP Rate of 10% is hereby applied on gross contract receipts taken at Rs. 16,50,16,355/- (including interest from FDR of Rs.
4,39,241/-) and financial expenses like depreciation, interest expenses and remuneration to partners are allowed totalling to Rs.63,80,297/-. The N.P. after the said disallowances is worked out at Rs.1,01,21,338/- after depreciation, interest and remuneration to partners. The ld. AO also noticed that the assessee has earned interest on Income Tax Refund of Rs. 1,00,510/-. The assessee has considered this as business income whereas the same is supposed to be considered as income from other sources. Based on these observation the I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 7 assessment order u/s 143(3) of the Income Tax Act was completed by the ld.
AO assessing the income of Rs. 1,02,21,850/- on 26.12.2016.
5. Aggrieved from the order of the assessing officer, assessee preferred an appeal before the ld. CIT(A). A propos to the grounds of the appeal so raised by the assessee, the relevant finding of the ld. CIT(A) is reiterated here in below:-
"4.2. I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order of the Income tax act, 1961 for the year under consideration.
The AO has rejected books of accounts mentioning that in respect of labour & carriage expenses, all expenses are in cash with only handmade vouchers, in earthwork expenses, all expenses are made in cash with no proof of identity of person to whom paid Mess, office expenses, telephone & travelling all are in cash payment with only internal vouchers. Further no site wise expenses register is maintained. In case of labour payments no muster roll register is maintained. In absence of stock register valuation of opening and closing stock can also not be tallied. Also no proper voucher/bill etc. for wages & labour expenses, expenses incurred towards purchase of raw material were there. Only Kachha bills or self made vouchers were maintained by the appellant. Most of these payments were made in cash, which is also not open for verification. Therefore the books of accounts of the appellant are hereby considered unsatisfactory and rejected u/s 145(3) of the Act.
Per contra the appellant argued that the appellant is a civil work contractor and Cement Supplier of MNREGA Department. Whatever material is purchased is consumed for their own work. The site workers use this material as per their requirements. Hence, it is difficult to maintain record for the consumption of material.
As per reply of the appellant the appellant accepted that record of consumption is not maintained as it is difficult to maintain.
The appellant firm maintained day to day books of accounts which are duly audited. The total expenditure occurred during the year under consideration is of Rs. 14, 72, 72,357. Out of this, Rs. 10,72,58,533 amount is paid through bank. Only the remaining expenses such as freight and carriage charges, earth work and other miscellaneous expenses etc. are made in cash because the transporters and some other people did not I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 8 accept payment through bank as online payments were not common during A.Y. 2014-15. Cash payments are made only when payment through bank was not possible and such transactions are only a few. Thus, the Learned AO has not verified the mode of payments thoroughly.
The appellant has not given any explanation with regard to non maintenance of muster roll register, stock register and no proper voucher/bill etc. for wages & labour expenses.
I agree with the findings of the AO that in the absence of these records the claim of expenditure is not verifiable. The rejection of books of accounts by the AO is found to be justified as per provisions of section 145(3) of Income Tax Act.
With regard to estimation of profit, I find that the AO has estimated net profit at the rate of 10 percent. The appellant claimed that while estimating the net profit past history of the appellant need to be seen. The appellant has relied upon the judgement in the case of CIT vs. Inani Marbles Pvt. Ltd. (175 Taxman 56), wherein it was held by the e Hon'ble High court tof of Rajasthan"....In Rajasthan a case where the provisions of section 145(3) are invoked, one has to consider either the past history of the assessee or history of similarly situated other businessmen/traders." In this case the appellant has demonstrated that the net profit of this year is better than earlier years even when the turnover is increased. This is apparent from the table furnished by the appellant as under-
A.Y. Turnover (in Net profit (in Rs.) Net profit rate Remarks
Rs.) depreciation before depreciation,
interest and salary interest and salary to
to partners partners (in %)
2012-13 8,49,55,630 40,52,383 4.77%
2013-14 8,34,09,632 43,32,648 5.19%
2014-15 16,45,77,114 89,16,561 5.42% Present A.Y.
Normally when the turnover increases the net profit decreases but it is not the case of the appellant. Further, the case of the appellant was scrutinized in earlier years also but there was no disallowance with regard to net profit.
The AO has relied upon judgement of ITAT for estimation of profit. However, the profit in that case was estimated on the basis of facts of that case which cannot be generalized.
Looking to these facts of the case it is seen that it is harsh on the appellant to almost double the declared net profit, when the appellant has shown better net profit than earlier years. Considering these facts, the disallowance made by AO is reduced to 1 percent of the amount paid through cash. The appellant admitted that out of total expenditure of Rs. 14, 72, 72,357/- Rs. 10,72,58,533/- is paid through bank. The I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 9 amount paid in cash comes to Rs. 4,00,13,824/-. Accordingly, the disallowance made by the AO is restricted to Rs. 4,00,138/- only.
5. Ground no. 2 of appeal related with addition of interest on refund. 5.1. The finding of the AO in the assessment order which is reproduced so far as necessary to decide the issue as under
"9. Income from other sources other sources 9.1 Interest Income:- on examination of books of accounts, it is noticed that the assessee had earned interest on Income Tax Refund of Rs. 1,00,510/-. The assessee has considered this as business income whereas the same is supposed to be considered as income from other sources."
5.2 The submissions of the appellant as per the statement of facts with Form No. 35 and reiterated during the appellate proceedings are as under:
"4. That the learned Assessing officer has erred in adding an amount of Rs. 100510 out of interest on income tax refund as Income from Other Sources. The assessee is a government contractor and Cement Supplier of MNREGA Department. He files his Income TaxReturn regularly. His total income includes income from business and interest from FDRs TDS gets deducted on all the work contracts received by him in his business. All the departments ask for bank guarantee before assigning him the contract and the bank gives guarantee against the FDRs opened by the assessee. Banks deduct TDS on the interests of FDRs. Thus, in both the cases, TDS is deducted for business purpose only. Since, the whole income of appellant assessee firm is generated under the income head 'Profits and Gains from Business or Profession' and the Income Tax is paid on this income generated purely from business only, thus, the interest received on the income tax refund shall be considered as a part of business activity.
In the case of income Tax Officer, Ward-l, Hanumangarh vs. M/s J.P.C. & Company, Bhadra, the Hon'ble ITAT, Jodhpur Branch, held that, "it is by now, a settled position of law that the interest received from such compulsory deposits by the way of FDRs, KVP and NSCS, which are taken necessarily under compulsion for the sake of business, are to be considered as income related to the business of the assessee."
We further pay reliance for the support of our argument on the judgement of Hon'bleITAT, Jaipur, in the case ofDCIT vs. Laxminath Infrastructure Pvt. Ltd. The Hon'bleITAT, Jaipur, on 31.10.2019, directed the Assessingofficer to treat interest income in the head of business income as has been claimed by the appellant because theassessee had to make FDR for taking the contract work from the department. The assessee has to deposits theFDR as security in the departments for obtaining contract work, which are purely for business purposes. TheInterest received from the FDR relate to the profit of business income and not income from other sources I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 10 Thus, the addition of Rs. 100510 out of interest on income tax refund as Income from Other Sources is erroneous."
5.3. I have considered the facts of the case and written submissions of the appellant as against the observations/findings of the AO in the assessment order of the Income tax act, 1961 for the year under consideration.
Only issue to be decided in this ground is that interest received from Income Tax Refund is assessable as business income or income from other sources. On this issue decision of Hon'ble High Court of Delhi in case of Commissioner of Income-tax -IV v. Delhi State Industrial & Infrastructure Development Corporation Ltd. is relevant. In this case it was held that-
"Section 2(24), read with section 56. of the Income-tax Act 1981 income-Chargeable as- Whether interest payable on income- taxrefund fulfills basic character as income defined under section 2(24) Held yes- Assessee paid income-tax- Subsequently assessee, as per orders of appellate authorities, got relief on issue and as a result received refund of income-tax, which was inclusiveof interest-Whether since basic characteristic of income being what amount/received towards statutory interest was ableto tax under head 'income from other sources'- held yes in favour of Revenue)".
Therefore, the ground raised by the appellant is found to be without any merit and dismissed accordingly. MENT
6. The last Ground of Appeal is that the appellant craves right to add, alter or amend any of the grounds of appeal.
7. The appellant has not added or altered any of the above mentioned grounds of appeal. Accordingly, such mention by the appellant in its ground is treated as general in nature, no needing any specific adjudication and is accordingly treated as disposed off.
8. In the result, the appeal of the appellant is treated as partly allowed."
6. As the appeal of the assessee was partly allowed by the ld. CIT(A), the assessee feeling dissatisfied with the finding so recorded by the ld. CIT(A) preferred the present appeal on the ground as reproduced hereinabove. To support the grounds so raised the ld. AR appearing on behalf of the assessee has placed reliance on the written submission which is extracted herein below:-
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 11 "FACTS: The facts of the issue is that the assessee is a partnership firm and doing the business of civil contractor with Govt. and Semi Govt. executed the work of Central stqte firm, Nagarpalika, PWD, RSRDC, Raj. Agricultur marketing Board etc. . He has filed its ROI declaring the total income of Rs.28,37,410/- on dt.01.10.2014. During the year under consideration the as declared the turnover of Rs.16,45,77,114/, on which the giving the Net profit of Rs.89,16,561/- giving the N.P. rate of 5.42% as against the turnover of Rs.8,34,09,632/- on which Net profit of Rs.43,32,648/- giving the N.P. rate of 5.19% in the last year. Assessee maintains Books of account and its accounts are audited u/s 44AB. The ld. AO has noted that assessee attended from time to time and filed required details. Books of accounts, bills and vouchers are produced, which were examined on test check basis. The ld. AO has noted that during the assessment proceedings it is found that no day to day stock register in respect of material consumption register for various site was maintained by the assessee. The ld. AO has stated that In respect of labour & carriage expenses all expenses are in cash with only handmade vouchers, in earthwork expenses, all expenses are made in cash with no proof of identity of person to whom paid., mess, office expenses, telephone & travelling all are in cash payment with only internal vouchers, Further no site wise expenses and stock register is maintained. In case of labour payments no master roll register is maintained.
The ld. AO on these has basis has stated that, therefore the books of accounts of the assessee are hereby considered unsatisfactory and rejected u/s 145(3). the ld. Ao has not issued any show cause notice before doing so. The ld. Ao has mentioned some judgments n the assessment order. The ld. AO has also mentioned the N.P. chart at page at 4 of the assessment order. The ld. Ao accepted in increase in the turnover and N.P rate.
The ld. AO has noted that estimation of net profit entails an element of subjective as the possibility of finding an exact match either in terms of a comparable entity or in terms of the entity own result in previous years- as facts of the cae change. The ld. AO has noted that when the books suffers from the same defects year after year, then it is to be noted that that the past history of the assessee cannot be basis of estimation of it's net profit as in none of the previous years the accounts of the assessee have been found to be acceptable on account of the serious defects. The ld. AO has applied or estimated the 10% N.P. rate on the gross receipts of Rs.16,50,16,355/-( including interest from FDR of Rs.4,39,241/-) subject to depreciation, interest expenses and remuneration to partners totaling to Rs.63,80,297/- and calculated the net profit at Rs.1,01,21,338/- after allowing depreciation, interest expenses and remuneration to partners, as against the net profit of Rs.89,16,561/- declared by the assessee.
The ld. AO has further AO held the interest income on IT refund as income from other sources as against business income declared by the assessee, without any show cause notice.
In first appeal the ld. CIT (A) assessee has filed the details WS and details. The ld. CIT(A) has held confirmed the rejection books of accounts . However with regard to estimation of 10% N.P rate he has stated that it is harsh on the appellant to almost double the declared net profit, when the appeaql has shown better net profit than earlier years. . Considering these facts, the disallowance made by the AO is reduced to 1% of the amount paid through cash. The amount paid in cash is Rs.4,00,13,824/-, accordingly the disallowance made by the ld. AO is restricted to Rs.4,00,138/-.
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 12 Regarding the interest income the ld. CIT(A) has confirmed the finding of the ld. AO. SUBMISSIONS:
1. On perusal of the assessment order it is found that theld. AO has made the trading addition only on the basis of no stock register has been maintained, quantitative and qualitative details of opening stock, closing stock and on cash payment of expenses etc,.
2. The assessee maintaining the complete books of accounts alongwith sales and purchase vouchers, expenses vouchers and other relevant record. The books of accounts also audited and uploaded the audited Balance sheet, Trading account, Profit and Loss account, audit report filed with Return of income. The accounts are audited u/s 44AB of the IT Act by the qualified person the Auditor examined all the books of accounts and give his audit report in which she did not point out any defects. The ld.
AO has noted general defects and discrepancies in those record. Hence wrongly rejected the books of account without any show cause notice. Each and every details have been kept by the assessee regularly and day to day book of accounts are maintained. There is no change in method of accounting. These shows the contradictory approach of the ld. AO. The turnover as well as net profit of the assessee is also increased by 25% in this year in comparison to last year.
2. Recently the Honble Raj. High Court has also took the view that the average G.P./N.P. rate of five years should be taken in the case of business. Copy of Raj. High Court Order in the case of Sh. Kishan Kumar Saraiwala v/s CIT in DBIT No. 325 and 338/2011 dt. 28.08.2017 is enclosed.
Comparative GP rate chart of last five years.
A.Y. SALES NET PROFIT N.P. RATE 2012-13 8 ,49,55,630.00 40,52,383/- 4.77% 2013-14 8,34,09,632.00 43,32,648/- 5.19% 2014-15 16,45,77,114.00 89,16,561/- 5.42% Average 5.12%
And in the year under consideration the assessee has already declared much N.P. rate of 5.42% as against average NP rate of 5.12%, which is very higher despite the comparable and due to tough competition market the N.P. rate may very year to year. However the ld. CIT(A) has partly consider the same and the ld. AO has ignored the same.
The same has been followed by this Honble bench in the case of ITO Bundi V/s Rameshwar Meena in ITA No. 420/Jp/2017 dated 30.04.2019 copy is enclosed. Hence no addition is required to be made and the entire addition may kindly be deleted on this ground alone.
2. Correct facts and evidences ignored by the AO: Firstly it is submitted that the ld. AO has ignored the correct facts, evidences and nature of business which are as under. The AO though made some allegation however, none of them are such so as to be based making addition as submitted below and more particularly when they are contrary to facts, details, legal position and submissions of the assessee were not considered judiciously.
3.1. In the case of Madnani Construction (P) Ltd V/s CIT 296 ITR 45 (Gau) it has been held that without pointing out any error in the P & L account and audit report, I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 13 the power of the best judgment assessment could not be invoked and low profit in a particular year itself cannot be a ground for invoking power of best judgment assessment.
In CIT v/s Om Overseas 315 ITR 185(P&H)Accounts--Rejection--Absence of specific defect--AO rejected assessee's books of account and made addition by applying GP rate of 27 per cent as against 25.38 per cent shown by the assessee-- CIT(A) has given a finding of fact that the addition was made by the AO without pointing out any specific defect in the books of account--Same upheld by the Tribunal--Departmental Representative unable to point out any illegality or perversity in the said finding of fact--Addition rightly deleted--No substantial question of law arises for determination.
In CIT v/s Mascot (India) Tools & Forgings (P) Ltd. 320 ITR 116 (All) held that Books of account are supported by the purchases vouchers, vouchers for expenses, stock record, and therefore, hypothetical and imaginary calculation of G.P. rate cannot be made unless some specific mistake in the books of account are pointed. In the absence of any specific instances of mistake in the books of accounts and other records, the book results cannot be rejected on the basis of any such hypothetical calculation based on erroneous presumption.
3.2 In Pankaj Diamond v/s ACIT 32 DTR 462(Ahd)(Trib.) It has been held that even after rejecting book results, addition can be made only on the basis of some material and not on the whims and caprice of the assessing authority. Trading results shown by the assessee compares favorably with the past accepted position in the case of assessee. Thus non maintenance of quality wise details of Diamonds did not empower the AO to make addition to the income of the assesses- Also no material was brought on record by the revenue to show that the value of closing stock shown by the assessee was incorrect or that the method of valuation consistently followed by it was incorrect.
4. No Fair additions done- Legal Position: Further it is submitted that even invoking of S.145 (Although here the ld. AO and CIT(A) have not invoked the provisions of Sec. 145(3)) 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, comparable case of same area after confronting with trading results 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. Refer Brij Bhushan Lal Parduman Kumar v/s CIT 115 ITR 524 (SC) Also kindly refer JotramShershing vs. CIT 2 ITR 119 (All). Shree Shankar Khandsari Sugar Mills v. CIT 193 ITR 669 (Kar).
However, it will appear that in the present case, the ld. AO has not made a fair estimation in conformity of the above settled judicial guideline, at the worst he should applied average rate of last five years which is 1.53%.
5. The AO proceeded on suspicion and it is settled principles that suspicion may be strong but cannot take the place of reality, kindly refer Dhakeshwari cotton Mills 26 ITR 775 (SC), Uma Charan Shaw v/s CIT 37 ITR 271 (SC).
6. Further both the lower authorities have not brought on record any comparable case in this type of case. And it is very general practice and things that on company items or I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 14 things the commission is given on lower side on MRP i.e there is less difference sale price or MRP and on local items or things the commission is given on higher side on MRP i.e there is huge difference sale price or MRP.
7. Hence in view of the above submissions the trading addition so made by the ld.AO may kindly be deleted in full and oblige The turnover of the assessee has also increased from Rs.8.34 crore to 16.45 crore i.e increased by 1000%. The allegation of the ld. AO is not liable to be acceptable and the addition made on these fabulous observation is liable to be deleted. In the case of Haridas Parikh v/s ITO 1 DTR 390 (Jd) it has been held " In the absence of any defect having been found in the books, there was no valid reason for rejecting the books and applying a higher G.P. rate which was earned by assessee on low sales of Rs.1.43 Crore in the preceding year compared to higher sales of Rs.1.54 Crore in the year under consideration"
2. During the course of assessment proceeding the assessee has produced the complete books of accounts alongwith sales and purchase vouchers, expenses vouchers and other relevant record also copy of audited Balance sheet, Trading account, Profit and Loss account, audit report filed with Return of income. The accounts are audited u/s 44AB of the IT Act by the qualified person the Auditor examined all the books of accounts and give his audit report in which he did not point out any defects. Further all the books of accounts admittedly were duly produced before the AO vide page 1 of assessment order and. He has duly examined and pointed out minor defects. Each and every details have been kept by the assessee regularly and day to day book of accounts are maintained. There is no change in method of accounting.
3. No proper basis or comparable case have been adopted by the ld. AO: Further we have to submit that the ld. AOwhileadopting or applying the 10% N.P. rate has not followed concrete basis or proper basis which should be followed while adopting the or estimating the trading addition. In this regard we are referring a recent judgment of this Honble Tribunal In the case of ACIT vs. EDIBLES LTD in ITA No. 479/JP/2019Jul 14, 2021 (2021) 62 CCH 0321 JaipurTrib it has been held that Accounts--Rejection of books of account--Determination of GP rate--Assessee company is engaged in business of processing of oil seeds and refining of crude oil for edible use--Assessee has filed its return of income--During scrutiny assessment, AO noted that assessee has shown GP at 2.57% on total turnover of Rs. 496,84,95,171/- as against GP at 3.16% declared for assessment year 2014-15--AO rejected books of account of assessee--Applying average GP @ 3.03%, AO has estimated income of assessee resulting in an addition--As regards trading addition, CIT (A) has not accepted estimation of income by AO by applying GP rate at 3.03% and accepted GP declared by assessee as reasonable except some addition on account of discrepancies pointed out in accounts which have resulted in addition @ 0.08%--CIT (A) has applied GP at 2.65% as against declared GP of 2.57% of assessee--Held, after rejection of books of account, AO is duty bound to frame assessment on best judgment under provisions of section 145(3) read with section 144--Best judgment assessment has to be framed by considering material on record and income has to be estimated on a reasonable and proper basis--Either past history of assessee or history of similar situated assessee in same line of business I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 15 could be considered as a reasonable and proper guidance for estimation of income-- Past history can have relevance where conditions in which business activity of later period is conducted are similar to those of earlier period in which case it would be reasonable to infer that proportion between turnover and profits remains unaltered--Test of comparability has to be applied either vis-à-vis assessee's own past history or past history of similar situated assessee on assumption that there was no significant changes and variations in business conditions and environment in which business was being conducted--Where there are significant changes in business conditions and environment vis-à-vis past years, past history may not provide an appropriate benchmark and in such situations, it may be more appropriate to consider current year profitability data of other assessees operating in similar line of business and in similar changed business conditions and environment as that of assessee and compare with assessee's current year profitability figures and determine appropriate variation--AO has worked out GP for 3 years including year under consideration which clearly defies general principle of comparability with past years results wherein current year GP has to be compared with average GP of past years only which has attained finality--Further, there is no finding given by AO as to how earlier year results are comparable in sense whether operations in earlier years were conducted under similar business conditions and environment as in current year--Assessee in his submissions before AO has stated that due to sluggish economic conditions, there is continuous fall in gross margins over past years which have continued during year resulting in reduced gross margins--Here, it is relevant to note that AO has accepted declared gross profit of 3.38% (with slight modification) in A.Y 2013-14 and 3.16% in A.Y 2014-15 demonstrating sluggish economic conditions as compared to earlier years gross profit of 4.56% in A.Y 2012-13 and 4.96% in A.Y 2011-12 but at same time, has not accepted gross profit of 2.57% for year under consideration which clearly shows inconsistency on part of AO in terms of comparability of past year results without factoring in sluggish business environment as duly pointed out by assessee--Another distinguishing feature, which we have noticed, is increase in average cost of purchase mainly on account of purchase of soya husk for first time during year under consideration which again makes past years data not exactly comparable-- Said approach of AO in blindly applying past year history cannot be held to be reasonable and appropriate for estimating profits--Further, there is no discussion and finding of AO regarding past years or even current year data of other assessees in similar line of business operating under same and/or similar business environment with which results of assessee could have been compared--CIT (A) while deleting addition made by AO has however appreciated facts of case in right perspective given a similar finding--A fall in GP for assessee may be coupled with a general recession in that sector and hence profits of all peers may have dipped--Similarly, year may represent an exceptional year wherein all peers have made exceptional profits-- Hence, while examining gross margins, AO should not only compare past margins of assessee but also current year margins of other assessees engaged in similar business--This would give an insight into actual profit margins during year under reference and would be a correct guide for estimation of profits--No business can have a minimum threshold G.P every year just to satisfy whims of Assessing Officer and working of A.O. is more theoretical and mathematical than cogent or real-- CIT(A) didn't agree with estimated increase in G.P. rate to 3.03% done by AO as I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 16 against 2.57% shown by assessee--There is no justifiable reasons in interfering with said findings of CIT(A)--Order of CIT(A) is upheld--Revenue's appeal dismissed.
The observation of the above judgments is also applicable in the present case and the same may taken in to consideration in the present case as our WS and the addition may kindly be deleted in full.
4. Higher turnover lower and higher N.P rate has been ignored by the lower authority.: Further the ld. AO has ignored that the turnover of the assessee has also increased from Rs.8.34 crore to 16.45 crore i.e increased by 1000% and also the better N.P rate. And for getting turnover more than three time a businessmen has to scarify its margin and in the present case rather assessee earned better N.P rate admittedly. Despite the facts that as now in the market there is cut throat competition market that is why for getting tender a business has to reduce its margin, rate or profit etc. And it can be understand only by a businessman and the AO has ignored these facts and he is not a businessman or technical person. Hence only due to some minor defects or low N.P. rate in this year addition cannot be made.
5. Invalid application of Sec.145: 5.1 The law u/s 145 stood amended by the Finance Act 1999-00 w.e.f. AY 00-01. The amended law u/s 145(3) provided three basis to invoke the same, viz (i) Where the AO is not satisfied about the correctness / completeness of the accounts (ii) where the method of accounting provided in Sub Sec. (1), is not followed or (iii) the Accounting Standards as notified u/s 145(2) have not been followed by the assessee.
5.2 We may submit that invoking of Sec.145 (3) on the facts of the present case was based on the misconception on law as well as on facts. The assessee further submits that correctness of book result cannot be challenged without pointing out any specific mistake/defect or deficiency in the books of account or without recording finding that the profits and gains cannot be properly deduced from such book of account it is very settled legal position and held in so many cases.
It is not disputed that the assessee has maintained all the books of accounts consisting. The entire receipts and purchase are fully vouched. The accounts are duly audited u/s 44AB of the Act by the qualified person the Auditor examined all the books of accounts and give his audit report in which he did not point out any defects. And admittedly the assessee has produced such books of accounts before the AO vide para 1 page 1 of the assessment order.
The AO though made only some allegation however, which are general in nature in this line of business and none of them are such so as to be based for invoking S. 145 as submitted below and more particularly when they are contrary to facts, details, legal position and submissions of the assessee were not considered judiciously.
6. In the case of Madnani Construction (P) Ltd V/s CIT 296 ITR 45 (Gau) it has been held that Low profit in a particular year is itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record-- AO relied upon a part of a transaction for the preceding year while rejecting the other. This is not permissible in law. Without pointing out any error in the P&L a/c and the audited report, the powers of best judgment assessment could not be invoked The purchase and sales fully vouched and supported by bills. There is no basis of higher estimating the G.P. rate. Kindly refer Haridash Parikh v/s ITO 113 TTJ274(Jd).
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 17 7.1 The Honble Raj. High Court in the case of Malani Ram Jivan Jagannath vs ACIT (2007) 207 CTR 19 (Raj) it has been held that quantum and value of purchase and sales were not disputed in as much as they were found to be fully vouched. Value of opening stock cannot be disputed as it came from closing stock of previous year. The inventories of closing stock cannot be found incorrect. That is to say actual stock position was not in dispute. The previous year books of account were not found incorrect. In doing so, it had ignored all admitted facts in the face of which there was no occasion for the AO to have resorted to estimated method. There being no dispute about the sales and purchases. Mere deviation in G.P. rate cannot be a ground for rejecting the books of account and entering realm of estimate and guesswork. Neither the rejection of books of account was justified nor resort to substitution of estimated GP by rule of thumb merely for making certain additions. When all the data and entry made in trading account were not found incorrect in any manner, there could not have been any other result except what has been shown by the assessee in the books of account. The facts of this case fully similar to the case of assessee. Also refer CIT v/s G.H.I polymers 192 CTR 477(P&H).
7.2 In CIT v/s Jacksons House 39 DTR 212(Del)(2010) held that Maintenance of stock register vis-a-vis particular form-finding of the tribunal that the method adopted by the assessee was a regular employed method and such that the income, profit and gain can be properly deduced there from-the accounts of the assessee are audited and no discrepancy was pointed out - maintenance of stock register of the nature expected by the AO was not feasible, considering the nature of business run by the assessee, AO was therefore not justified in rejecting the accounts and estimating higher GP rate. In CIT v/s Smt. Poonam Rani 326 ITR 223 (Del): Held that the AO has not pointed out any particular defects or discrepancy in the books of account maintained by the assessee, mere fall in G.P. rate alone could not by itself be a ground to reject the accounts of the assessee u/s 145(3).
In CIT v/s Mascot (India) Tools & Forgings (P) Ltd. 320 ITR 116 (All) held that Books of account are supported by the purchases vouchers, vouchers for expenses, stock record , and therefore, hypothetical and imaginary calculation of G.P. rate cannot be made unless some specific mistake in the books of account are pointed. In the absence of any specific instances of mistake in the books of accounts and other records, the book results cannot be rejected on the basis of any such hypothetical calculation based on erroneous presumption.
In CIT v/s Patiala Distt. Co-Op. Milk Producer's Union Ltd. 328 ITR 615(P&H) held that there was no justification for rejecting assessee's books of account as the assessee was maintaining its accounts in accordance with a consistent method and the AO has not pointed out any defects in the books of accounts or in the valuation of closing stock.
In DCIT V/S Vishwanath Prasad Gupta 52 DTR 346(Jab)™ - Mere low G.P. rate and non maintenance of stock register Item wise 145(3) is not justified. In Shree Ambikaji Rice Mills v/s CIT 192 ITR 189(Pat) when Low G.P. rate explained no books can be rejected on the presumption of the AO.
8. 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).
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 18 9: Alternatively and without prejudice to above submissions on merits also it is submitted that no addition at all was called for in view of the following facts and submissions:
9.1. No Fair additions done- Legal Position: Further it is submitted that even if the provision of S. 145(3) is applicable, than 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, comparable case after confronting with trading results and repute of the assessee.
He is also supposed to collect necessary material for this 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. Refer Brij Bhushan Lal Parduman Kumar v/s CIT 115 ITR 524 (SC) Also kindly refer JotramShershing vs. CIT 2 ITR 119 (All). Shree Shankar Khandsari Sugar Mills v. CIT 193 ITR 669 (Kar).
However, it will appear that in the present case, the ld. AO has not made a fair estimation in conformity of the above settled judicial guideline and facts of the present case. Hence as stated above that if the books of account of the assessee is held to be rejected u/s 145(3) than as per very settled legal position in law that the N.P rate may be applied, by considering, comparable case and nature of business subject to interest and depreciation, which is allowable as per law and settled legal position. Thus, the application of N.P. rate covers all the trading receipts and all the expenditure of the P&L account and no separate disallowance is permissible. In Malu Khan & party v/s DCIT 30 TW 164(Jd) held that despite the fact that the provision of S.145 are made applicable, the addition on this account cannot be sustained until and unless some specific defects or instance are pin pointed in the accounts of the assessee. The suspicion how so ever strong cannot be made basis for addition.
10. Excess Profit and tax paid by the assessee: 10.1 It is pertinent to note that the appellant has declared better Net profit rate and excess income of profit in this year Rs. 89,16,561/- as against 43,32,648/- in last year which is more then to double. In the year under consideration the turnover as well as net profit has increased drastically and paid more tax than to last year but the ld. AO has ignored this vital facts and proceed on mere assumption and guess work and estimated the net profit without bring any material evidence and any comparable in support of him. Further if there was a decrease in the net profit rate, but at the same time the turnover is also increased about 1000% this case i.e. from 8.343 crore to 16.45 crore approx. And the assessee has declared much profit and paid more tax then to last year. As per normal prevailing practices in the market in order to increase the turn over the business man has to sacrifice about the rate of profit on turnover. In this particular case in the year under consideration the turnover is increased by 1000% , the net profit rate was also increased despite considering the nature of trade, cut throat completion in market and the ultimate business conducted by the assessee firm. The assessee is to state that there was no change in the nature of business in the year under consideration. But the Ld. AO as well as the ld. CIT(A) have not appreciated the position of income and the explanations furnished in this respect in their true perspectives. The Ld. AO has further erred in applying high flat rate of net profit before depreciation and interest. The Ld. AO has not brought on records any comparative case also. In this respect we I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 19 also like to submit that if we compare the net profit on capital employed by the assessee firm it appears that the assessee firm had earned Considering the issue of rate of return from all aspects it appears that the assessee firm has earned profit at very reasonable rate and there was no necessity to disturbed the income determined and declared on the basis of books even though the books have been rejected. The above basic facts and vital issue that the profit declared by the assessee in the year under consideration was much more better in all respect and the net profit of the year under consideration was declared about 330% higher in comparison to profit of earlier year which is also go in favor of the assessee and regarding this we rely upon on the finding of the Honble ITAT Jaipur Bench in the case of M/s Hanuman Tubewel Company Vide para 7 of page 5 of order in ITA No. 265/Jp/2010 dt. 25.06.2010 for A.Y. 2007-08.
The AO proceeded on suspicion and it is settled principlesthat suspicion may be strong but cannot take the place of reality, kindly refer Dhakeshwari cotton Mills 26 ITR 775 (SC), Uma Charan Shaw v/s CIT 37 ITR 271 (SC).
11. No basis : The ld. AO has not at all provided a valid basis to apply a higher NP rate of 10% and there is also basis by the CIT(A) to make the addition by applying the 1% disallowance on the cash payment, which was not the case of the ld. AO and the ld. CIT(A) altogather has taken different step without giving any show cause notice before doing so and it is settled law that no estimation of income cannot be made without any material or evidence or base.
B:- Treating the interest income as income from other sources: 12.1 Further it is submitted that the ld. AO after applying the N.P. rate on the contract receipts has treated the interest of Rs.1,00,510/- earned on FDR's bank Interest as income from other sources in the computation of income without giving any show cause notice or without confronting to the assessee, hence the ld. AO has erred in treating the interest income, as separate income under the head income from other sources as against the business income shown by the assessee without appreciating the fact that all such income are also part and parcel of regular business activities of the assesses firm. The separate credit in accounts was according to accounting principal for determination of correct profit. Such rebate/discount has been received on account of contract activities only. There were no other activities of the firm. The accounting head or the head of income cannot be arbitrarily imagined by the AO without bringing on record the sources of income from other head. The deposits were required to be placed a security to obtain contracts for business purposes and hence the interest on the same is also part of business activities and accordingly credited in the Profit and Loss account of the business. Further we may submit that the appellant was not having surplus fund from which, investment towards FDR were made in as much as the appellant took loan and credit facilities from the bank and from those funds only, it had obtained FDR's. The object of the FDR's are to pledge the security deposit and bank grantee in the course of business, without this no contract work is possible. 12.2. The assessee is a contractor and for obtaining the work the assessee needs FDR & NSC etc as a security for registration with the government departments and thereafter to furnish earnest money to participate in tenders and then to obtain bank guarantees against these FDR's & NSC's to provide performance guarantees to the awarders and also to obtain limits from bank for working capital required for execution of the works contract.
Without FDR's the business of the assessee cannot survive-
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 20
(i) In the absence of FDR's the contractor will not be able to get registration with the government department, he will not be able to participate in tenders, he will not be able to give bank guarantee, he will not be able to obtain loan facility for working capital for execution of work. At every step he needs FDR's. In the absence thereof he cannot carry on the business.
(ii) If he liquidates all his FDR's supposing not required for business, all the FDR's shall got adjusted by the Bank against the loan sanctioned to the assessee as 100% FDR's are pledged with the bank. The bank guarantees will revert back. All the work will stop. The assessee will not have any liquid fund to carry on the business and to start with the business process again. Ultimately he will have to put a lock. Thus the assessee does not have any surplus funds or say surplus FDR.
(iii) It impossible for the assessee to in cash the FDR's as per his will, it is beyond his control. These are completely blocked in the business of contractors.
There are many other factors which also establish that there is a direct nexus between the FDR's/NSC's and business activity.
In view of the above facts and circumstances we submit that:
(a) FDR's & NSC's have been purchased under compulsion of business requirements.
(b) At every step right from starting of business to the stage of execution, the contractor needs FDR's & NSC's.
(c) 100% FDR's & NSC's are either pledged with bank or marked Lien in favour of Government Departments who allots the work or kept as security for obtaining bank guarantees.
(d) It is the FDR's which are rotating in the business in the form of bank loan, Bank Guarantee, Earnest Money or it is the bank finance which is producing the FDR's and vice versa. FDR's are inter woven in carrying on the business.
(e) FDR's are infrastructure for the picking up the business and then in execution of the work. FDR's or the Business are moving around each other like a hub and wheel. No one can be separated from each other. Both are gripped together by the business cycle.
(f) Assessee has no control over these FDR's & NSC's.
(g) Because of FDR's & NSC's the assessee is paying additional cost in the form of excess interest payment to bank and payment of bank guarantee commission.
During the year he incurred extra financial cost but at this cost he has been able to succeed in big tenders and getting the work in his favour and then succeed in execution thereof.
(h) FDR's & NSC's are not out of idle or surplus funds.
(i) Intention for purchasing the FDR's is not to earn the interest but it has the prospective of taking benefit of business opportunities. The intention is to acquire business and execute the business.
Recently the Honble Raj. High Court in the case of M/s Choudhary And Brothers v/s DCIT in DBITA No. 355 and 356/2017 dt. 31.08.20218 it has been held that " In the result, the appeals are allowed. The judgement of the ITAT dated 24.7.2017 is set aside and that of the CIT(A) in regard to interest earned on FDRs and NSCs dated 18.3.2016 is restored and the matter is remitted back to the Assessing Officer for I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 21 passing fresh order of assessment in accordance with law keeping view the question answered by this Court."
Thus now the matter is also covered.
In CIT V/s Producin (P) Ltd. 290 ITR 598 (Kar.) Business income--Vis-a-vis income from other sources--Interest on surplus funds kept in short-term deposits-- Deposits were made in the bank with the money received as advance in the export business which is the main activity of the assessee--Thus, the amounts deposited in the bank and the interest income derived from such deposit have close link with the business activity of the assessee company and, therefore, the interest is assessable as business income CIT v/s TriputiWoolan Mills Ltd 193 ITR 252 (Cal). Also refer 79 ITD 41 (TM) ACIT v Gallium Equipment (P) Ltd., ITA No. 339(Delhi) of 1994, A.Y. 89-90 dt. 23.04.01 In CIT v Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) dt/ 23.4.99 Held: Assessee had deposited money to open a letter of credit for the purchase of the machinery for setting up its plant as per terms of supplier. Interest was earned on this deposit. It was held that this is, therefore not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case was directly linked with the purchase of plant and machinery. Hence any income earned on such deposit is incidental to the acquisition of assets for the setting up the plant and machinery. Court further held that in view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v CIT (1997) 227 ITR 172 will not be attracted. In CIT V Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) dt. 18.12.1998 :Held dismissing the appeal that the first three heads of income were (i) the rent charged by the assessee to its contractor for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) the hire charges for plant and Machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and
(iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was much to ensure that the work of the contractors carried out without any financial hitch as to help the contractor. The arrangement which were made between the assessee company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had therefore been rightly held as receipts and not income of the assessee from any independent source. In the case of Shyam Bihari vs. CIT 345 ITR 0283(Pat.) held that Business income--Income from other sources--Interest from FDRs--Assessee a Civil Contractor and his business income was of contract work from government departments--AO rejected the books of account and applied the proviso to Section I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 22 145 (3)--Further the interest earned by the assessee was assessed as income from other sources--The assessee objected to inclusion of interest income being assessed as income from other sources on the ground that income was from money deposited in FDR and NSC which was required to be furnished by way of security for securing the contract work and therefore it should have been treated as income from business and not from other sources--Held, interest earned by the assessee on the investment of amount in fixed deposits which was only to provide a bank guarantee to the contractee in order to acquire the contract work, could not be treated as income from other sources and had to be treated as business income only The Karnataka High Court in CIT Vs. Chinna Nachimuthu Construction 297 ITR 70 noticed that the investment of amount in fixed deposits by the assessee was only to provide a bank guarantee to the contractee in order to acquire the contract work. On such facts it held that the interest income could not be treated as income from other sources and had to be treated as business income only. In view of law laid down in clear terms in the judgment of Karnataka High Court noticed, the Tribunal as well as the subordinate revenue authorities erred in holding that interest accrued on security deposits to the extent used for the purpose of securing the contract work would also be assessable as income from "other sources".
In the case CIT vs. Jaypee DSC Ventures Ltd.335 ITR 0132(Del.) held Income--Chargeability--Interest on security deposit for bank guarantee--Bank guarantee was furnished as a condition precedent to entering the contract and further it was to be kept alive to fulfill the obligations--It had an inextricable nexus with securing the contract--Interest earned by the assessee is capital in nature and shall 13.1 No Show Cause by the ld. AO before invoking the provision of Sec. 145(3) also not for application of 10% Net profit rate and for treating interest income from other sources:
13.2 The ld. CIT(A) has also not issued any notice before taking different view of adopting 1% disallowance of cash expenses.:
The ld. AO has not issued any show cause notice before invoking the provision of Sec. 145(3), for applying the 10% NP rate and for treating interest income from other sources. Further the ld. CIT(A) has also not issued any notice before taking different view of adopting 1% disallowance of cash expenses. It was mandatory on the part of the ld. CIT(A) and ld. AO to issue the specific show cause notice to this effect asking to the assessee as to why the provision of Sec. 145(3) may be invoked, why the 10% NP rate should be applied and for treating interest income from other sources, and should not be taxed under the head income from other sources separately. It is very settled legal position that a person(assessee) is entitled to opportunity to show cause as to why not the income of the assessee is determined and charged or taxed in the manner as proposed by the Assessing Officer but in the instant case no such type of opportunity had been provided hence the addition so made may kindly be deleted. But the ld. AO has failed to do so, which is against the principal of natural justice and against the law. Thus how the ld. AO can taxed the income of interest separately. Hence the entire addition is liable to be deleted. in full kindly refer Sanghi Brothers (Indore)Limited v/s Inspecting ACIT 122 CTR 19(MP), Malik Packaging v/s CIT 284 ITR 374 (All), T.C.N. Menon v/s ITO 96 ITR 148(Ker).And it is the settled law that no addition can be made without issuing the show cause notice or without confronting to the assessee..
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 23 In the case of Shreyas Builders &Anr. vs. M.d. Kodnani& ors.* (2000) 161 CTR 0527 : (2000) 242 ITR 0320 it has been held that A perusal of the show-cause notice shows that it neither discloses the material nor the reasons. It is a cryptic notice. It does not indicate the material on the basis of which the Appropriate Authority reached the tentative conclusion that the transaction is undervalued. It also does not disclose any reason why the Appropriate Authority has reached the tentative conclusion that the transaction has been undervalued. It is further to be seen here that in ground (b) of the petition a grievance in this regard has been made by the petitioners and in the affidavit in reply filed by the respondent/ competent authority, the competent authority does not state the reasons for non-disclosure of the material as also the reasons in the show-cause notice. The basic approach of the authority is erroneous. Unless the Appropriate Authority discloses the reasons why it prima facie finds that the transaction is under valued, the person to whom the show-cause notice is issued would not be able to put up a defence. Thus issuance of such show-cause notice would defeat the very purpose for which the show-cause notice is required to be issued. A show-cause notice which does not disclose the material on the basis of which the Appropriate Authority has reached the tentative conclusion that the transaction has been undervalued and the reasons for reaching that tentative conclusion is a defective show-cause notice and, therefore, an order made on the basis of that show-cause notice would be an incompetent order and, therefore, liable to be set aside.--Mrs. Nirmal Laxminarayan Grover vs. Appropriate Authority (1997) 139 CTR (Bom) 40 : 1995(2) Mh. L.J. 755 : TC S3.267 followed;C.B. Gautam vs. Union of India (1992) 108 CTR (SC) 304 r/w (1993) 110 CTR (SC) 179 : (1993) 199 ITR 530 (SC) : TC S3.142 relied on.
14. Hence in view of the above submissions the book results declared kindly be accepted and the entire Addition may kindly be deleted in full."
7. To support the various contentions so raised by the ld. AR of the assessee, he relied upon the following evidences:-
S. No. Particulars Page No. 1. Copy of ITR with computation of total income. 1-6 2. Copy of audited trading and P & L A/s of last three year 7-181
8. The ld. AR of the assessee submitted that on the one hand the ld. CIT(A) hold that the claim of expenditure is not verifiable and on the other hand hold that it is harsh on the assessee to almost double the declared net profit, when the I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 24 assessee has shown better result and net profit than earlier years. Considering these aspect of the matter he reduced the disallowance restricted to Rs.
4,00,138/- only on the payment paid in cash by the assessee. Thus, when the ld.
CIT(A) hold that the assessee has submitted the better results there is no need to sustain the addition for even 1 % that too on all the payments. As regards the other part of addition being the amount of interest income tax refund sustained the ld. AR of the assessee fair not pressed this grounds on merits.
9. Per contra, the ld. DR relied upon the order of the lower authorities.
10. We have heard the rival contentions, perused the material placed on record and gone through the judicial precedent cited by both the parties to drive home their respective contentions. The brief facts of the case is that the assessee is a partnership firm engaged in the business of civil construction with government and semi government. The ld AO noted that the assessee has not maintaining stock register, therefore, violation of opening and closing stock cannot be deleted. The ld. AO noted that no proper vouchers/bills for wages and labour expenses, expenses incurred towards purchase of raw material were there and only self made Kacha bills were made available by the assessee. Most of these payments were made in cash and therefore, he rejected of books of accounts by invoking provisions of section 145(3) of the Act and estimated the I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 25 profit @ 10% of the total turnover of the assessee after allowing deduction of financial expenses depreciation interest expenses and remuneration to partners.
The assessee challenged the findings of the ld. AO before the ld. CIT(A) and the ld. CIT(A) noted that it is harass on the assessee but almost double declaration of net profit when the assessee has show one better net profit generally error.
Considering this aspect of the matter, he sustained 1% of the amount paid by the assessee in cash and thereby sustain the addition of Rs. 4,00,138/-only. The assessee challenged the finding which is contrary itself before us. The ld. AR of the assessee vehemently argued that the purchases are made in accordance with the requirement of the cite and therefore, once the cite supervision incharge of these materials, there is no much difference of having stock register. Since the assessee is engaged in the business of construction contract with government agency the contract in time bound manner and the local purchases are inevitable. The Bench also noted that out of total expenditure of Rs.
14,72,72,357/-, Rs. 10,72,58,533/- has been paid by account payee cheque.
Even the profit declared by the assessee is better and turnover is also increased this obviously on account of better control and result show one by the assessee and therefore we see no reason even to sustain the addition of Rs. 4,00,138/- in the hands of the assessee. Thus, we direct the ld. AO to delete the addition of Rs. 4,00,138/- made in the hands of the assessee. In terms of these observations ground no. 2 of assessee appeal is partly allowed.
I.T.A. No.197/Jodh/2023 M/s Satish Kumar & Company 26
11. As the other addition is disputed for an amount of Rs. 1,00,510/- being the interest income on tax refund not considered income of the assessee and since the assessee has not press these amount on merits and the same is dismissed. In terms of these observations ground No. 2 is partly allowed. Other raised by the assessee either consequential or technical and therefore, the same is not required to be adjudicated.
In the result, the appeal of the assessee is partly allowed.
Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963 by placing the details on the notice board.
Sd/- Sd/-
(Rathod Kamlesh Jayantbhai) (DR. S. Seethalakshmi)
Accountant Member Judicial Member
Dated 11/03/2024
Santosh
Copy of the order forwarded to:
(1)The Appellant
(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.
True Copy
By order