Income Tax Appellate Tribunal - Jaipur
Kiran Infra Engineers Ltd., Jaipur vs Acit, Jaipur on 28 November, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ ITA No.897/JP/15
fu/kZkj.k o"kZ@Assessment Year : 2012-13
M/s Kiran Infra Engineers Ltd., cuke The ACIT, Circle-4, Jaipur
B-141, Road No. 9D, VKI Area, Vs.
Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AACCK 8188 N
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ ITA No.997/JP/15
fu/kZkj.k o"kZ@Assessment Year : 2012-13
The ACIT, Circle-4, Jaipur cuke M/s Kiran Infra Engineers
Vs. Ltd., B-141, Road No. 9D, VKI
Area, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AACCK 8188 N
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Manish Agarwal (CA)
jktLo dh vksj ls@ Revenue by :Shri Rajendra Singh (Add. CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 14.10.2016
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 28/11/2016.
vkns'k@ ORDER
PER SHRI VIKRAM SINGH YADAV, A.M.
This are two cross appeals filed by the assessee as well as by the Revenue against the order of Ld. CIT(A)-2, Jaipur dated 26.10.2015 wherein the assessee as well as the Revenue have taken following grounds of appeal:
ITA No. 897/JP/15 & ITA NO. 997/JP/15M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur ITA No. 897/JP/15 (assessee's appeal) (1) On the facts and in the circumstances of the case, the ld. CIT(A) has grossly erred in upholding the rejection of books of accounts and invoking provisions of section 145(3) of the IT Act, 1961. (2) On the facts and in the circumstances of the case the ld. CIT(A) has grossly erred in upholding the addition of Rs. 1,41,721/- by sustaining the application of G.P. rate of 8% as against 6.76% declared by the assessee on turnover of Rs. 1,14,52,126/- in manufacturing activity arbitrarily, without appreciating the submissions made, thus the same deserves to be deleted.
(3) On the facts and in the circumstances of the case the ld. CIT(A) has grossly erred in making a lump sum disallowance of Rs. 30 lacs out of various expenses as against the application of profit rate of 8% on contract receipts of Rs. 45,08,97,697/- by the ld. AO relating to the signalling and telecom work done for Indian Railways arbitrarily, without appreciating the submissions made and records produced and further without bringing on record any material to support of such a high lump sum disallowance, thus the disallowance so made on lump sum basis deserves to be deleted.ITA No. 997/JP/15 (Revenue's appeal)
(i) Whether on the facts and in the circumstances of the case and in law the CIT(A ) has erred in making disallowance of expenses instead of trading addition relying upon the decision of the earlier year ignoring the fact that the AO made addition reasonably and after rejecting books of account pointing out specific defects.
(ii) Whether on the facts and in the circumstances of the case and in law the CIT(A ) has erred in appreciating the fact that past history of the assessee reflects rejection of books of account which was upheld by the ITAT, which establishes the fact that true profit cannot be deducted from the rejected books of account.
(iii) Whether on the facts and in the circumstances of the case and in law the CIT(A ) has made lump sum disallowance of Rs. 30 lacs instead of trading addition of Rs. 89,72,864/- made by the AO without giving any reasonable basis. The CIT(A) failed to acknowledge that the AO had pin pointed specific defects and reasonably apply GP ratio.2 ITA No. 897/JP/15 & ITA NO. 997/JP/15
M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur
2. The brief facts of the case are that the return of income for the year under consideration was filed by the assessee declaring total income at 25,06,330 and the assessment was completed u/s 143(3) at a total income of Rs. 1,16,21,740/- by making various additions after invoking the provisions u/s 145(3) of the Act. In first appeal, Ld. CIT(A)-I, partly allowed the appeal. In respect of additions sustained by Ld. CIT(A), assessee has preferred this appeal and in respect of relief granted by ld. CIT(A), department is in appeal before us.
3. In ground no. 1 of assessee's appeal, the assessee has challenged the action of ld CIT(A) in confirming rejection of books of accounts and application of provisions of section 145(3) of the Act. During the course of hearing, the ld AR has not pressed this ground of appeal. Hence, ground no. 1 of assessee's appeal is dismissed as not pressed.
4. The ground no. 2 of assessee's appeal relates to action of Ld.CIT(A) in upholding the addition of Rs.1,41,721/- by sustaining the application of G.P rate of 8% applied by Ld. AO as against 6.76% declared by the assessee on turnover of Rs.1,14,52,126/ in respect of its manufacturing activity. 4.1 The AR of the asessee has submitted that the assessee had declared G.P. of Rs.9,16,170/-, which comes to 6.76%. However, Ld. AO applied rate of 8% in respect of turnover of manufacturing activity also. Ld. CIT(A) vide para 3.3 page 10 of his order, confirmed the order of AO on the basis of observations of Hon'ble ITAT for A.Y.2009-10, which are as under:
"In ground No.3 in cross objection of assessee, the assessee has challenged the estimation of income by application of gross profit rate of 4.25% on the turnover of Rs. 5,00,07,802/- in manufacturing activity resulting into substance addition of Rs.3,02,290/-. The Ld. CIT(A) vide para 4.2 of the impugned order has restricted the trading addition on the basis of his best judgement and found no rational in the estimates resorted to by the Assessing officer,we therefore do not 3 ITA No. 897/JP/15 & ITA NO. 997/JP/15 M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur find any good reason to interfere in the such reasoning taken by the exercise of his conterminous power as that of the Assessing Officer."
In this regard it is submitted that in A.Y.2009-10, assessee had attained turnover of Rs. 5,00,07,802/- and declared G.P. @ 3.65%, whereas Ld. AO applied GP rate of 7%. On appeal, Ld. CIT(A) reduced the GP rate to 4.25% on following observations:
"However considering that the appellant company had declared GP in the vicinity of 5.38% to 5.90% in the preceding years and that there was increase in the turnover by 660% as compared to preceding year, I direct the AO to apply GP @ 4.25% on the gross turnover."
Subsequently, Hon'ble ITAT confirmed the above view of Ld. CIT(A), which has been made basis by Ld. CIT(A) for confirming the rate application for captioned assessment year.
Here, it would be pertinent to examine comparative gross profit chart for the manufacturing activity, which is as follows:
A.Y. Sales Gross Profit Rate declared
by the assessee
2010-11 2,04,89,004 12,14,346 5.92%
2011-12 1,38,80,048 8,41,865 6.06%
2012-13 1,14,52,126 7,74,449 6.76%
A bare perusal of above facts would reveal that for A.Y.2009-10, Ld. CIT(A) restricted the addition made by AO in view of GP rate declared by assessee in preceding years, whereas in captioned A.Y., Ld. CIT(A) has relied upon the order of Hon'ble ITAT brushing aside the fact that assessee has already declared the GP at 6.76% which is very much in parity with preceding years, thus the reliance placed is misplaced more particularly when the G.P. upheld in A.Y. 2009-10 was only 4.25%. Besides relying upon the order of Hon'ble ITAT in 4 ITA No. 897/JP/15 & ITA NO. 997/JP/15 M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur A.Y. 2009-10, Ld. CIT(A) has given no basis for upholding the G.P. rate of 8%. In view of above facts, it is prayed that GP rate declared by assessee may please be accepted and addition of Rs.1,41,721/- may please be deleted. 4.2 The ld DR is heard who has relied upon the order of the ld CIT(A). 4.3 We have heard the rival contentions and pursued the material available on record. The AO has not specified the basis for adopting 8% G.P rate which is apparently followed as in the past years. If we look at the past history in respect of appellant's manufacturing activity, the appellant has reported a G.P rate of 6.76% on turnover of Rs 114,52,126 which is better than G.P rate of 6.06% on turnover of Rs 1,38,80,048 reported during AY 2011-12. Similarly, for AY 2010-11, on turnover of Rs 2,04,89,004, the appellant has reported a G.P rate of 5.92%. The trend which is emerging is that though the turnover of the appellant has decreased during the year, it is able to report a G.P rate of 6.76% which is better than past years. Going by the past history of the case, we therefore delete the addition of Rs.1,41,721/- in respect of manufacturing activity. Ground no. 2 of the assessee's appeal is thus allowed.
5. In respect of ground no.3 of assessee's appeal and Ground no.1 to 3 of revenue's appeal, it is noted that all these grounds of appeal relate to addition in respect of contractual activities made by AO by applying GP rate of 8% on gross contract receipts of Rs.45,08,97,697 and thereby making trading addition of Rs.89,72,864/-. On appeal, Ld. CIT(A) deleted the addition made by AO by applying GP rate and rather confirmed the disallowance of Rs.30,00,000/- on ad hoc basis relying upon the decision passed by Hon'ble ITAT for A.Y.2009-10. In respect of addition sustained to the tune of Rs.30 lacs, assessee has preferred the appeal, whereas in respect of relief granted by Ld. CIT(A), department has preferred the appeal before us.
5 ITA No. 897/JP/15 & ITA NO. 997/JP/15M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur 5.1 The Ld. AR of the assessee has submitted that during the year under consideration, assessee company continued its old activity of Railway Contractor where the job mainly relates to the conversion of old traditional signaling system to the Modern Colour Light Signaling System for various divisions of Indian Railways. The contracts are awarded by the Railway after objective analysis of the tender submitted and the work executed are subject to the critical and regular inspection and supervision by the Railways Authorities requiring frequent re-doing of the job as any failure in the signaling system involves precious public life. Safety and the infallibility of the Indian Railway signaling system is a well known feature thus the job requires very high technical competence and is always material intensive i.e. the material part of the job is substantially on the higher side in comparison to other elements like labour etc. The material involved in such jobs is of special types and the patterns development for obtaining specially designed products makes it a high cost affair. This is also relevant to state here that the execution of works also needs co-ordination with various Railway Authorities / Departments such as Traffic, Safety, Electricity etc. so that the installation of signalling system can be done as 'ON LINE' working resulting into delays and co- ordination expenditure.
During the year under consideration the works executed by the assessee are of similar nature as executed in the immediately preceding assessment year and some works were the carried over from the preceding assessment years.
So far as maintenance of books of accounts are concerned, the assessee company has consistently followed the mercantile system of accounting as provided u/s 145A of the Income Tax Act, 1961.
6 ITA No. 897/JP/15 & ITA NO. 997/JP/15M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur Further, as regards the maintenance of stock records, the material applied in job work is first delivered to the Railway authorities who after making comprehensive inspection about the quality has kept the same in its stock yards and thereafter goods are released to assessee for the execution as per the daily requirement at work site. Thus in this process all the purchases and consumption of all the major items are fully accounted for and verifiable.
Regarding labour payments, it is submitted that the same has been incurred at the various work sites by the site incharge by engaging local labours for which the amounts on lump sum basis has been transferred to site which has utilized accordingly. The work has been carried out at the site which are located parallel to the railway track lying in the remote areas including jungles as well where the basic facility such as water, electricity, food etc. to the labour were not available and in those conditions the work has to be completed within the time frame of the contract which fact has also adversely effected the maintenance of the precise records. Also due to the fact that work sites were spread all over the country it is practically not possible to employ permanent labours and therefore, work has been completed by hiring local labours who are not only habitual to the local conditions but also costed less as compared to the permanent labour since the transportation and local stay of the permanent labour would be the additional cost therefore, the work has been completed by engaging local labour. Since the precise details of the expenditure incurred at sites were not available, auditors had put the remarks in their audit report.
As submitted above assessee is a railway contractor and the work involved is highly specialized and is of technical nature which involves human safety at 7 ITA No. 897/JP/15 & ITA NO. 997/JP/15 M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur large and receives highest possible attention from the contractees because the works involved being in the nature of creation of signaling systems, any error/failure of the system may endanger the life of thousands of human beings as the failure of signal may lead to dreaded accidents resulting into colossal loss of Railway properties therefore the assessee cannot be put at par with the civil contractors. The fine points distinguishing the assessee from a civil contractor are summarized as under :-
- That the assessee company absolutely dealing with Indian Railways and solely executing the works contract for them, it cannot be taken at par with other civil contractors particularly when it has not done any civil works.
- The entire contract work done is highly specialized and is of technical nature which involves human safety at large and receives highest possible attention from the contractees because the works involved being in the nature of creation of signaling systems, any error/failure of the system may endanger the life of thousands of human beings as the failure of signal may lead to dreaded accidents resulting into colossal loss of Railway properties.
- The assessee company undertakes creation of signaling system including replacement of traditional signaling system to colour light signaling system. The assessee company also undertakes the supply and erection of operational mechanism including the equipment utilized therein lying at a distance of few kms. from Railways stations and the signalling posts requiring most precise and meticulous working of the system, the failure of which may not only lead to serious financial implications in the nature of penalty but even put the partners of the firm to criminal consequences.
- The material involved in the execution of works contracts is compulsorily required to be procured from the approved suppliers of the Railways (technically known as RDSO approved suppliers). It may incidentally be 8 ITA No. 897/JP/15 & ITA NO. 997/JP/15 M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur noted that the approved suppliers always tend to charge higher prices as compared with the open market because of the higher standards applied for production of material for Railways having rich specifications, which is not of routine nature.
- The quality control over the material and erection job at contractee's end (Railways) is very strong and the assessee company has to suffer repeated rejections of the works done due to strict and vigorous inspection by the contractees. The job involved is highly specialized and technical in nature.
5.2 The results declared by the assessee in contract activity for the year under appeal and of immediately preceding two assessment years are tabulated as under:
A.Y. Gross Contract Receipts G.P. Rate
2010-11 65,06,27,000.00 5.94%
2011-12 52,29,79,837.00 5.99%
2012-13 45,05,97,697.00 6.00%
From the perusal of the above chart it was submitted that the appellant has been able to maintain the profit rate despite of fall in gross receipts. It is also relevant to note that the expenditure incurred by the assessee on the various work sites are most reasonable and moderate looking to the nature of work which are duly supported by the relevant invoices and vouchers maintained for the expenditure claimed. The allegations of the ld. AO regarding the maintenance of books of account are general in nature and no specific material has been brought on record in support of the allegations made by the ld. AO. It is thus submitted that the results declared deserves to be accepted.
Without prejudice to our above submission, it is submitted that while sustaining the disallowance of Rs.30 lacs on ad hoc basis, Ld. CIT(A) at para 4.3 9 ITA No. 897/JP/15 & ITA NO. 997/JP/15 M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur page 12 of his order has observed that "since the nature of contract and works being executed by the assessee have remained the same and respectfully following the order of the Tribunal as above a disallowance of expenses of Rs.30 lacs is made instead of estimating the gross profit as done in past."
It is worthwhile to note here that Ld. CIT(A), though has followed the decision of Hon'ble ITAT, however without considering the fact that for A.Y.2009-10, gross contract receipts amounted to Rs. 46,28,68,976/- against which Hon'ble bench confirmed disallowance of Rs.10 lacs, whereas for the captioned assessment year, disallowance of Rs.30 lacs has been sustained by Ld. CIT(A) against the total turnover of Rs.45,08,97,697/-,which is even lower than that of A.Y.2009-10. It is therefore, submitted that addition, if any, be suitably reduced looking to above facts.
5.3 The ld DR is heard who has relied upon the order of the Assessing officer.
5.4 We have heard the rival contentions and perused the material available on record. The books of accounts rejected u/s 145(3) are not in dispute. The limited issue for our consideration relates to estimation of G.P rate in relation to appellant's contractual activities undertaken for Indian Railways. The assessee has reported a G.P rate of 6% as against 8% estimated by the AO. Interestingly, both the appellant and the Revenue have stood their ground over the past many years and maintained a consistent position of reporting 6% in the return of income and the AO estimating it at 8%. The matter had then reached the Tribunal and the Tribunal over the past many years has upheld G.P rate of 7% except for AY 2009-10. Nothing has been brought to our notice in terms of subsequent appeal before the Hon'ble High Court by either of the parties in respect of these years. In AY 2009-10, the Coordinate Bench, after 10 ITA No. 897/JP/15 & ITA NO. 997/JP/15 M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur taking into consideration earlier orders of the Coordinate Benches for the past years, following the Hon'ble Rajasthan High Court decision in case of Kanhiya Lal Jangir (217 ITR 354) has upheld a disallowance of Rs 10,00,000 on reported turnover of Rs. 46,28,68,976/-.
5.5 The findings of the Coordinate Bench for A.Y.2009-10 in ITA No. 712/JP/2012 & C.O No. 01/JP2013 dated 26/04/2013, on the basis of which Ld. CIT(A) has confirmed disallowance, are contained at Para 16 page 18 of its order which is reproduced as under:
"......The Ld. CIT(A) is also not found to have considered these peculiar facts when he based his decision on the estimate resorted by the Ld. CIT(A) in earlier years and sustained by the Appellate Tribunal when revenue preferred an appeal against that order. The appellant, though claims to be not satisfied with the earlier years estimations yet did not prefer any appeal against the order of Ld. CIT(A) in those years for various reasons including the fact that it wanted to set the controversy at rest. Finding that the department is amused in raising controversy and has disregarded the factual position of correctness of account. The appellant has filed cross appeal in this year so that the justice is rendered to it.The appellant, therefore, has contested that the true profits can be deduced from the rejected accounts as well. We therefore, having regard to the judgement rendered by the jurisdictional High Court in the case of Kanhiya Lal Jangir Vs ACIT (2008) 217 TR 354 (Raj.)and considering the over all conspectus as well as circumstances and peculiar facts of this case and also the earlier in issued judgements, find no rational in such estimation in the impugned year. We, therefore, consider it reasonable to estimate the profit for the peculiar year under consideration by making a disallowance of expenses of Rs.10 lacs and modify the trading addition sustained by the Ld. CIT(A) accordingly."
5.6 Given that there is no change in the facts and circumstances of the case and the order of the Coordinate Bench for AY 2009-10 is the latest decision on the matter which has considered the earlier decisions of the Coordinate Benches, respectfully following the same, we deem it reasonable to sustain the 11 ITA No. 897/JP/15 & ITA NO. 997/JP/15 M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur trading additions to Rs 10 lacs and modify the trading additions sustained by ld CIT(A). The ground no. 3 of assessee's appeal is partly allowed and ground no. 1-3 of the Revenue's appeal is dismissed.
In the result the appeal filed by the assessee is partly allowed and the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 28/11/2016.
Sd/- Sd/-
(KUL BHARAT) (VIKRAM SINGH YADAV)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur
Dated:- 28/11/2016
Pillai
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s Miran Infra Engineers Ltd., Jaipur
2. izR;FkhZ@ The Respondent- The ACIT, Circle-4, Jaipur
3. vk;dj vk;qDr@ CIT -II, Jaipur
4. vk;dj vk;qDr¼vihy½@The CIT(A)-II, Jaipur
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No.897/JP/2015) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar.12 ITA No. 897/JP/15 & ITA NO. 997/JP/15
M/s Kiran Infra Engineers Ltd. vs. ACIT, Circle-4, Jaipur 13