Income Tax Appellate Tribunal - Agra
Shri Raj Kumar Mittal, Morar vs Jcit Range3, Gwalior on 4 September, 2018
In the Income-Tax Appellate Tribunal,
Agra Bench, Agra
Before: Shri A.D. Jain, Judicial Member And
Shri Dr. Mitha Lal Meena, Accountant
Member
ITA No.182 /Agr/2016
Assessment Year: 2010-11
Shri Raj Kumar Mittal, vs. JCIT, Range - 3,
Prop. Manish Mittal, Gwalior
Kalpana Nagar, C.P. Colony,
Morar Gwalior
PAN ABLPM 9012 E
(Appellant) (Respondent)
Appellant by Shri K.C. Agarwal, Advocate
Respondent by Shri Waseem Arshad, Sr. D.R.
Date of Hearing 14.08.2018
Date of Pronouncement 04/09/2018
ORDER
Per Dr. Mitha Lal Meena, A.M.:
This appeal has been filed by the assessee against the order of the ld. CIT(A) dated 29.02.2016, for A.Y. 2010-11wherein the assessee has raised the following grounds of appeal:
"1. On the facts and in the circumstances of the case, the Ld Assessing Officer erred in law and Ld. Joint Commissioner of ITA No.182/Agr/2016 2 Income Tax Range 3 Gwalior confirming the rejection of the audited books of accounts u/s 145(3) of the Income Tax Act. For a minor and excusable deficiency. The accounts of the assessee may be directed to be accepted.
2. Without prejudice to ground No.1 above, the Assessing Officer further erred in law and Ld. Joint Commissioner of Income Tax Range 3 Gwalior confirming the application of net profit rate of 8% on the gross contract receipts without looking into assessee's past history and other comparable cases on the same area, same nature of works and of the contemporaneous period. The application of net profit rate at 8% resulting in an addition of Rs.5041687/- may be deleted."
2. The effective issue for adjudication is whether the estimation of income of the assessee by the AO by applying net profit rate of 8%and confirmed by the CIT(A) was justified.
3. Briefly stated the facts of the case are that the assessee is engaged in the business of electric contract work with government and semi government department and maintained regular books of accounts, bills and vouchers, duly audited accounts u/s 44AB of IT Act. The AO vide para 2 required the assessee to file certain details regarding site- wise proof of payments, sand purchase, expenses in respect of sub contract, stock inventory etc. Being not satisfied with the reply of the assessee, the AO has applied net profit rate of 8% on the gross receipt of Rs.9,82,78,472/- after rejecting the books of account of the assessee u/s 145(3) of the Act.
4. The Ld. CIT(A) while confirming the order of the AO observed vide para 6 as under:
ITA No.182/Agr/2016 3"6. I have considered the facts of the case, the written submissions as filed by the .AR and perused the order of the AO as well. As regards the application of net rate 8% the AO in his order has given sufficient reasons for rejecting the assessee's books of accounts. The assessee vide its written reply filed before the AO had accepted that confirmation from sundry creditors could not be submitted due to shortage of time, also showed his non-availability of evidence for sand purchased. Vide para 4 of reply submitted before the AO the assessee admitted that he has no any justification for the payments made to persons specified u/s 40A(2)(b) of the Act to the sub-contractors. Complete vouchers for expenses, could not be produced. Vide para 8 of reply, the assessee admitted that there are some discrepancies in the books of accounts and some vouchers are not available for verification and himself accepted that a net profit of rate of 5% may be applied. Therefore, in this view of the matter, the assessee admitted the irregularities in the books of accounts. In the cases of contractors, the application of rate of 8% is reasonable, which is in conformity with provisions of section 44AD of the Act. Though provisions of section 44AD of the Act may not be invokable where the turnover exceeds the amount liable for audit, however these provisions definitely serve as a guide for adopting the net profit rate when the book version of an assessee is found to be suffering from infirmities and unreliable. In this regard, it is observed that the facts of the appellant's case are squarely covered by a decision of Hon'ble ITAT Agra as rendered in the case of Mahesh Chandra Contractor, vs. Income-tax Officer (ITA No.359/Agra/2011) wherein it has been held that: -
"6. We have heard the Ld. Departmental Representative and considered the Paper Book filed by the assessee. Admitted facts of the case are that the assessee is a civil contractor who did not maintain proper books of account. The assessee did not furnish relevant bills and vouchers of purchase and expenses before the Assessing Officer. In the light of the facts, we uphold the order of the Assessing Officer in rejecting the books of account. After rejecting the books of account, the issue to be decided is estimation of ITA No.182/Agr/2016 4 income. The Assessing Officer estimated the income on total contract receipts by applying 8% profit rate and interest income was separately added to the total income. The contention of the -: assessee was that there are several decisions of contract where 5% Net Profit rate has been applied for estimation of income from contract business. It has also been submitted that in Assessment Year 2005-06 the Net Profit rate was only 4% wherein in the case under consideration the Net Profit rate is 5.02%, The Assessing Officer applied 8% Net Profit rate without giving any basis. The assessee has also pointed out that on similar situation the Net Profit rate upto 6% has been accepted even I.T.A.T. level. It was also submitted by the assessee in the written submission before the CIT(A) that the interest income of Rs.79,400/- is business income of the assessee, therefore, separate addition is not warranted. The estimation of contract receipt includes this interest income also. After considering the totality of the facts of the case, past history of the assessee and statutory presumptive tax scheme of the Act, section 44AD wherein for such cases 8% rate of profit on total turnover has been prescribed to determine the business income. We are aware that though the said section 44AD does not directly apply to the case under consideration as the said section 44AD applicable in the case of the assessee where turnover is not exceeding the prescribed limit. In the case under consideration, there is no good reason for estimating profit by applying lower rate than 8% as small assessee having turnover not exceeding Rs.40 lakhs are legally required under section 44AD to disclose profit by 8%. In the light of the above discussions, we confirm the order of Assessing Officer and CIT(A) where 8% profit rate has been applied for estimation of income. However, we find force in the submission of the assessee in the written submission that the interest income of Rs. 79,400/- is business income and the same need not be separately added in estimation by applying 8% profit rate. The interest income which is business income of the assessee is covered in the said estimation and separate ITA No.182/Agr/2016 5 addition is not required. We, therefore, modify the order of the Assessing Officer and CIT(A) and direct the Assessing Officer not to include the interest income of Rs.79,400/- in estimation of total income. The assessee gets relief of Rs.79,400/-. With the above direction, the order of CIT(A) is confirmed.
5. The counsel for the assessee submitted that the assessee has maintained regular books of account, bills and vouchers which are subject to audit u/s 44AB of the Act; that during the year, he has shown a net profit rate at Rs.28,19,606/- after the deduction of depreciation of Rs.5,64,864/- and payment made to sub-contractors of Rs.3,00,26,349/- out of the total contract receipt of Rs.9,82,78,472/- which comes to 2.8% of the gross contract receipt and that the net profit of the immediately preceding A.Y. i.e. 2009-10 was shown at Rs.33,36,268/- from the gross receipt of Rs.11,39,80,532/- with a net profit rate of 2.93% had been scrutinized by the Department in the scrutiny assessment order passed u/s 143(3) by the Ld. ACIT, Circle-3 Gwalior by assessing total income of the assessee at Rs.36,51,843/- which comes to net profit of 3.38% only. The counsel for the assessee to support his contention filed a written synopsis and paper book are placed on record. The relevant part of the synopsis is extracted hereunder:
Synopsis dated 9.07.18 pages 1 to 5 "1. The assessee is carrying on business of electric contract work with government and semi government department and maintain regular b.ooks of accounts, bills and vouchers, duly audited accounts u/s 44AB of IT Act. The assessee filed return of income declaring total income of Rs. 27,73,510.00 during the year and shown net contract receipts of Rs.9,82,71,472/- showing NP rate of 2.87%. the case was taken under scrutiny by the learned. AO u/s 143(3) and AO examined the accounts.ITA No.182/Agr/2016 6
2. The contract work are done in the interior places, villages by the assessee. The material purchased locally at places of sites and vouchers so far available are maintained and other purchases internal vouchers are maintained. The learned AO vide para 2 noted that site-wise proof of payments of wages on different dates not furnished, no evidence of purchases made locally and expenses made in cash, no stock inventory for goods was made available to him
3. The assessee replied each queries noted in para 3 by the AO and furnished the list of payment of wages which is on record of AO. Sand was purchased locally for laying on runway and other upper side of cabling. Internal vouchers were available.
Part of contract work for about Rs. 3.00 crores was given to sub contractors for completion at 2% profit. It was submitted that payment to sub-contractor was made on the same rate. Vouchers of purchase and sales were produced partly, on account of missing of some files and some of the vouchers could not be produced.
4. Assessee submitted that he valued the stock on the basis of report of Supervisor on spot and he has maintained regular accounts which were duly audited and on account of cut throat competition in the market and due to market rates increased, the purchase rates of material consumed increased and there was no escalation clause in the tender and the net profit decreased. However, after discussion with JCIT on account of some defects in maintenance of account, assessee agreed for application of net rate of profit at 5% to buy peace of mind and to keep cooperation with the department and to avoid further litigation with the department subject to no penal action taken by AO.
5. But to the assessee utter surprise, the learned AO instead of applying net rate of 5%, as discussed with him, he applied net rate of 8% on the total gross receipts and made addition of Rs. 50,41,687/- as mentioned at page 3 & 4 of the assessment order.
6. The assessee submitted the full facts again before CIT Appeal and nature of the business of completing the contracts at interior places and some of the goods were purchased locally for which internal vouchers are submitted and were to the extent of Rs. 3,00,26,349/- was given to sub- contract for competing the same at 2% and IDS was also deducted. He has also submitted as in the past similar rates of net profit have been accepted by the department with minor additions of expenses and other comparable cases net profit rate of 2% have been applied vide written reply filed before CIT Appeal.
7. The learned CIT Apeal did not appreciate the submission of the assessee and relying on the ITAT judgment of one building contractor Mahesh Chandra Vs ITO ITA No. 359/Agra/2011 confirmed the rate of 8% applied by the AO and he also ITA No.182/Agr/2016 7 confirmed the rejection of accounts on the similar grounds as mentioned by the AO.
Submission before Income Tax Appellate Tribunal Rejection of accounts illegal
1. At the outset, it is submitted that looking to the nature of the business of electric contract done at the interior places where local purchases are made of various goods, the maintenance of accounts made by the assessee was fair and reasonable and in the audited report of the auditor has also given a clean report. No major defect has been found by the learned AO in the accounts, except some non maintenance of vouchers etc. the rejection of the accounts was not proper u/s 145(3) of IT Act.
Past History case not followed
2. Secondly, the learned AO has completely ignored the past history in this case. Assessee is doing business since A.Y. 2007-08 chart showing past history of the case is filed at page 1 of the paper book all along in the past 2007-08 to 2009-10, profit varies from 2.7% to 2.93% on the contract receipts upto A.Y. 2009-10 was shown by the assessee and learned ITO in A.Y. 2007-08 made a similar addition and assessed the net profit of 3.2%. similarly in 2009-10, he also made small addition and as against net profit rate of 2.93% shown a total turnover of Rs. 11,39,80,532, he assessed the net income at 3.3% making a small addition of Rs. 3.2 lakhs only.
3. That in the year under reference the fantastic addition of Rs. 50,41,687/-has been made by AO and sustained by CIT Appeal by applying a net rate of 8% which is neither based on the material on record nor as per the discussion of application of 5% NP Rate made with JCIT during the assessment. Assessee therefore submits that entire addition made is wholly unjustified and the addition if at all is to be made then it should [)e in conformity with the past years. Comparable cases to be followed
4. Thirdly two cases were submitted before CIT Appeal but he did not consider the same. He quoted some other cases of Mahesh Chand Building Contractor of Civil work which is entirely a different case which yielded much higher rate of net profit and was never confronted to assessee. The assessee relies on case of Sanjay Traders, ITA No. 91/11/2013 A.Y. 2009-10 in which CIT Appeal applied a net rate of 2% and on further appeal by the assessee in that case the Hon'ble ITAT by order dt. 28.06.13 maintained net rate of 2% on the basis of judgment of AR Enterprises rendered by ITAT in other cases referred to the order of ITAT in the page 4,5 & 6.
ITA No.182/Agr/2016 85. Recently, the present bench in the case of Satish Thakur Vs ACIT Gwalior had upheld net rate of 3% in the similar types of cases judgments is filed.
6. That the lordship of Allahabad High Court in the case of Delta Engineering Co. Pvt. Ltd. Vs CIT (1990) 186 ITR page 383 Allahabad has held that the estimate of income made by the AO and in that case was correctly made on the basis of material on record and past history of the case and it was perfectly in accordance with the law.
In support, the assessee he further relies on various High Courts and Supreme Court that no addition can be made or sustain based on mere presumption surmises and suspicion as it cannot take placed of proof.
1. Lal Chand Bhagat Ambica vs. CIT (1959) 37 ITR Page 271 (SC)
2. Uma Charan Shaw & Bros. Vs. CIT (1959) 37 ITR Page 271 (SC) In view of this matter, it is submitted that entire addition made of Rs. 50,41,687/- is illegal and unjustified and may kindly be deleted.
6. The ld. DR on the hand relied on the impugned order.
7. Heard. It is undisputed fact as per order sheet entry dated 08.02.2013 (Para 4 Page 2 of AO's order) thatin compliance to questionnaire dated 19.10.2012, the assessee filed detailed information along with confirmation and produced the books of accounts, which were examined on test check basis. The AO has further noted in Para 1 Page 2 of his order that assessee has duly complied to the questionnaire issued along with the notices u/s 143(2) an 142(1) of the Act as follows:
͞In response to the notices issued assessee's authorized representative (AR) Shri Mahendra Agrawal, Advocate, attended the proceedings from time to time and represented the case of behalf of the assessee. The details called for have been furnished which are placed on record.͟ ITA No.182/Agr/2016 9
8. The counsel for the assessee submitted that during the course of assessment proceedings, the AO, JCIT, Gwalior, test check and verified complete and full accounts maintained and duly supported by subsidiary records and most of the bills/vouchers for material and expenses. The accounts were audited under section 44AB by a Chartered Accountant, the books of accounts backed by most of the bills and vouchers. The Assessing Officer without appreciating the nature of business of Electrical contractor carried out at interior and odd places and other constraints mechanically rejected the accounts u/s 145(3) wrongly stating that no any bills/vouchers are maintained and accounts are not susceptible to verification and applied a very high, exorbitant, imaginary and impracticable rate of net profit of 8% on the contract receipts without considering assessee's own past history and other comparable cases of similar facts.
9. It is further submitted that the authorities below have also not considered the payments made to sub-contractors of Rs. 30026349/-
and deducted TDS thereon @ 1%. The assessee sub contracted the work @ 2% net profit for the completion of the contract work for Government and Semi Government Department within given time and no further capital investment has to be made in the work. He further submitted that the contracts receipt is subjected to TDS deduction by the department from the gross payments against the contract in the name of the assessee.
ITA No.182/Agr/2016 1010. The counsel contended that the addition made by AO and sustained by CIT Appeal by applying a net rate of 8% is neither based on the material available on record nor as agreed by the assessee vide its reply dated 11.03.2013 for application of 5% NP Rate made with JCIT during the course of assessment proceeding (Assessee's reply, point 8, as per assessment order Page 3).
11. The comparative of N.P. chart against gross receipts for last three year is reproduced hereunder:
Asstt. year Gross receipts Net profit %
2008-09 71313104/- 2036086/- 2.86
2009-10 113980532/- 3336268/- 2.93
2010-11 98278472/- 2819606/- 2.87
12. The Ld. CIT(A) relied on the decision of Mahesh Chandra Contractor, vs. Income-tax Officer(Supra)wherein the case of civil contractor in the absence of maintenance of books of account, bills and vouchers and stock register a N.P. rate of 8% was upheld in an ex-parte order by ITAT, Agra Bench. Whereas in the present case the assessee has maintained books of account, bills and vouchers and other supporting documents which were duly produced before the AO for necessary verification during the course of assessment proceeding.
ITA No.182/Agr/2016 11Thus, the case relied by the Ld. CIT(A) is not applicable to the facts of the present case.
13. In the case of Sanjay Traders (Supra), ITAT Agra Bench, confirmed net profit rate of 2% as reasonable applied by the CIT(A) as against 3.5% applied by the AO.
14. In another case, of Satish Thakur Vs ACIT Gwalior (Supra), we had upheld the net profit rate of 3% in the case of civil contractor.
15. The Jurisdictional Hon'ble Allahabad High Court in the case of Delta Engineering Co. Pvt. Ltd. Vs CIT (Supra), held that after rejecting the accounts, the authorities made an estimate of income on the basis of the material available and past assessment records: Held, that the estimate was valid.
16. The factual matrix proved that the objections of the AO, the ld. CIT(A) and Sr DR as regards to the site-wise proof of payments, sand purchases, expenses in respect of sub contract, stock inventory are based on presumption, surmises and suspicion. The authorities below ought to have either considered the past trading results and comparable cases in the same line of business or contract line of business or brought relevant material evidence to point out specific deficiency in the books of accounts of the assessee. Moreover, the assessee is a govt. contractor where all the contract receipts are subject to TDS under as per the provisions of the Act. Further, the assessee has agreed for a NP rate of 5% for the minor irregularities if any, although none pointed out by the department. Following Apex Court, in the case of Lal Chand Bhagat ITA No.182/Agr/2016 12 Ambica vs. CIT (1959) (Supra) and Uma Charan Shaw & Bros. Vs. CIT (1959) (Supra), no addition can be made or sustained based on mere presumption, surmises and suspicion and accordingly, we do not find the objections of the department justified and as such, rejected.
17. The main grievance of the assessee is regarding the estimation of income of the assessee by applying a fair and reasonable net profit rate. The CIT(A) ought to be fair and honest in its approach while confirming the estimation of the income of the assessee and the estimation should have reasonable nexus to the material available on records and circumstances of the case. It is also equally settled position in law that the estimation of N.P rate has to be made on the basis of past trading results (history) or comparable case on similar facts. Estimation of profit is purely a question of fact meaning thereby that no particular rate of profit has universal application and depending upon the facts and circumstances of each case the rate of profit varies. It therefore implies past history of the assessee's own case is the most relevant guide for estimation of profit.
18. It is noted that ld CIT(A) has also ignored the provisions of Sec. 145(3)/144 of the Act by not appreciating the trading results declared by the assessee in the earlier years and has confirmed the avery high and unreasonable net profit rate of 8% on the gross total receipts which is without any basis by taking support of the provisions of sections 44AD which are not applicable in the present case because the turnover of the assessee is in several crores.
ITA No.182/Agr/2016 1319. For arriving at the view that past history is the best guide to estimate profit where book profit is unbelievable, we derive authority from the Hon'ble Jurisdictional M.P High Court Judgement in the case of 'VrajlalManilal & Co. Vs CIT', (1973) 92 ITR 287 (M.P) "Section 145 of the Income-tax Act, 1961 Method of accounting - Estimation of profit - Assessment year 1957-58 - Whether previous orders of assessment, although they may even be best judgment assessments, would form good material or good evidence for purpose of computing income of assessment year in question - Held, yes."
20. In the above view, the grievance of the assessee is accepted as justified. In the peculiar fact of the case of the assessee, it is just fair and reasonable to estimate income of the assessee at the Net Profit rate of 5.0% as against 8% estimated by the authorities below. Accordingly, the ground is partly allowed.
21. In the result, the appeal of the assessee is partly allowed.
(Order pronounced in the open Court as on 04 /09/2018)
Sd/- Sd/-
(A.D. Jain) (Dr. Mitha Lal Meena)
Judicial member Accountant Member
Dated: 04 / 09/2018
Aks - Doc
ITA No.182/Agr/2016 14
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Agra Bench, Agra
ITA No.182/Agr/2016 15
Date
1. Draft dictated / (DNS) 27.08.2018 PS
2. Draft placed before author 27.08.2018 PS
3. Draft proposed & placed before the second member JM/AM
4. Draft discussed/approved by Second Member. JM/AM
5. Approved Draft comes to the Sr.PS/PS PS/PS
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk PS
8. Date on which file goes to the AR
9. Date on which file goes to the Head Clerk.
10. Date of dispatch of Order.