Income Tax Appellate Tribunal - Indore
S.K.Jain, Bhopal vs Assessee on 16 April, 2013
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IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND
SHRI R. C. SHARMA, ACCOUNTANT MEMBER
I.T.A. No.21/Ind/2013
Assessment year:2008-09
M/s S. K. Jain, Vs. Dy. C.I.T.-1(1),
Bhopal. Bhopal.
PAN:AAOFS1606A
(Appellant) (Respondent)
I.T.A. No.604/Ind/2012
Assessment year:2008-2009
A.C.I.T.-1(1), Vs. M/s S. K. Jain,
Bhopal. Bhopal.
(Appellant) (Respondent)
Appellant by :Shri H. P. Verma and
Shri Pankaj Shah
Respondent by :Smt. Mridula Bajpai, CIT, D.R.
Date of hearing :16/04/2013
Date of pronouncement :17/04/2013
ORDER
PER R. C. SHARMA:
These are cross appeals filed by the assessee and the Revenue against the order of CIT(A) dated 31/08/2012 for the assessment year 2008-09.
2. Rival contentions have been heard and record perused. The facts in brief are that the assessee is a partnership form deriving income from civil contracts. The assessee firm is mainly engaged in the business of civil contractorship doing mainly 2 work of Irrigation Department of M.P. Government. During the year under consideration, the assessee had shown contract receipts of Rs.162,68,50,827/- on which net profit of Rs.8,54,19,410/- was shown giving rise to profit rate of 5.25%. In the course of scrutiny assessment, the Assessing Officer observed that net profit shown by the assessee was substantially low as compared to the net profit shown in the immediately preceding year giving rise to net profit rate of 6.45%. The Assessing Officer further stated that during the course assessment proceedings the assessee produced the agreements with the sub-contractors. From the agreement it is seen the profit charged by the assessee from its sub-contractors ranges between 5% to 7%. Thus, it is clear that the assessee after keeping its margin ranging from 5% to 7% and deducting TDS @1.02% the balance amount was given to sub- contractor, which makes the net profit percentage enjoyed by them on hire. In most of the case the profit is either 6% or 7%. The Assessing Officer further observed that during the course of search assessment proceedings for the assessment year 1999-2000 to 2005-06, it was also examined that the sub-contractors of the assessee firm have shown net profit in the range of 4% to 8%. If the margin/profit sharing of sub-contractor of the assessee firm is considered, the profit margin in respect of all these receipts of work allotted to assessee firm works out to 9% to 12%. Therefore, the profit margin ratio in the case of work allotted to sub- contractor as shown @4% by the assessee is not acceptable. Looking to the range of profit taken by the assessee from the sub-contractors of 5.75% to 7% it would be reasonable enough to take the same @6% as this percentage of 6% is almost average of profit charged from the sub-contractor.
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3. The Assessing Officer found various discrepancies in the books of account maintained by the assessee. Stock register was found to be not maintained, therefore, the valuation of closing stock at Rs.55,70,000/-, as made by the assessee, could not be verified. The Assessing Officer further found that an amount of Rs.10.29 crore are debited towards material purchase and other expenses, most of the payment was made in cash and the Kachcha voucher was kept by the assessee. It was also observed that mostly bills and details were not maintained and even the assessee has not maintained any supporting details. In respect of labour expenses of Rs.29.46 crores debited to the profit & loss account, the Assessing Officer found that the assessee has not maintained proper details of labour payment nor muster roll etc. Vide submission dated10/10/2006, the counsel of the assessee has produced few muster roll. On verification of labour payment vouchers, it is found that most of the signatures seem to be bogus and do not contain proper signature. The labour payment vouchers does not contain any details like name, signatures of labour to whom payment was made. It is also found on perusal of labour vouchers that the all labour vouchers were prepared on the same day. It is also examined that mostly vouchers are unsigned. It is noticed that mostly labour vouchers does not contain signature of receivers. No supporting evidence has been produced related to above vouchers. It is also found on perusal of labour vouchers that mostly entries have been made on the same day. The assessee debited more than 17% amount towards labour expenses. Considering the high gross receipts shown by the assessee, the net profit of the assessee is not found acceptable. 4
4. Thereafter the Assessing Officer discussed the provisions of section 145(3) of the Act, where the Assessing Officer was not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2) have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144 of the Act. Accordingly, provisions of section 145(3) of the Act were invoked and the Assessing Officer rejected the books of account and estimated net profit at 8% on own work and 6% on work done by sub-contractor. This observation of the Assessing Officer was as under:
"In view of the discussion made in above paras it is reasonable enough to estimate the profit @8% on the work done by the assessee itself and @6% on the work allotted to the sub-contractors. The working of the profit will be as under:-
Estimating the net profit @8% on work done by the assessee itself of Rs.60,26,85,585 Rs.4,82,14,868 Estimating the net profit @6% on work done by the sub-contractors of Rs.1,02,41,64,969 Rs.6,14,49,898
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Total estimated net profit Rs.10,96,64,766
Less:Net profit as shown by the assessee Rs. 5,54,19,410
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Balance Rs. 2,42,45,356
5. Against the above order the assessee approached the CIT(A). After
discussing the discrepancies pointed out in the books of account, the CIT(A) confirmed the action of the Assessing Officer for rejection of books of account u/s 145(3) of the Act. However, he has estimated the net profit at 5.75% after having the following observations:5
"13. I find that the Hon'ble I.T.A.T. has taken a consistent view on the matter and NP rate of 8% as estimated by the Assessing Officer has been brushed aside by way of a speaking order after discussing the issue at length. During the year under consideration also, the turnover is much more than the limit specified u/s 44AD.
The Assessing Officer has also not given any cogent reason for estimation of NP rate at 8%. Thus, the estimation of NP rate @8% cannot be sustained.
14. It is seen that the appellant has shown net profit rate of 7.37% in respect of works executed by the appellant itself and 4% on subcontracted work. It is seen that the Assessing Officer has appreciated the fact that the profit margin of the appellant in case of subcontracted work is less which is evident from the estimation of the profit made by the Assessing Officer @8% and 6% respectively in respect of own work and subcontracted work. As stated above, the submissions of the appellant cannot be accepted as the appellant has shown net profit of Rs.8.54 crores as against net profit of Rs.9.30 crores, inspite of increase in the amount of turnover by Rs.18.50 crores (Rs.162.68 crores less Rs.144.18 crores). I am of the considered opinion that the ends of justice would meet if the overall profit on turnover of Rs.162,68,50,826/- is estimated @5.75% for the following reasons:
a) It is seen that during the year under consideration, there is a substantial decline in the amount of expenditure on account of material and other expenses not only in terms of absolute figures but also in relative terms and in percentage terms, the same is found to be the lowest in comparison to the earlier years. This fact needs consideration and cannot be ignored.
b) The Assessing Officer has not given any cogent reason for estimating the net profit rate @6% in case of subcontracted work and merely stated that looking to the range of profit taken by the appellant from the subcontractors of 5.75% to 7% it would be reasonable enough to take the same @6% as this percentage of 6% is almost average of profit charged from the sub-contractors.
c) The Assessing Officer has not disputed the submission of the appellant that all the sub-contract are given by assigning proper agreements and the list of sub-contractor was filed at the time of assessment.6
d) I find that the assertion of the Assessing Officer with regard to profitability from sub-contracted business is not by virtue of any reference drawn from the agreement with the sub-contractors.
It is not the case of the Assessing Officer that the appellant has shown excessive payment to any sub-contractor over and above what was mentioned in the agreement.
e) I do find force in the submission of the appellant that the percentage of work given on sub-contract is comparatively much higher than in comparison to earlier years. I am in agreement with the submissions of the appellant that net profit ratio on the work done by own is much higher than the net profit ration on work given on sub-contract basis and I find that the Assessing Officer has also accepted the version of the appellant as he has adopted differential net profit rates for two types of work. It is seen that the proportion of sub-contract work, during the year under consideration, was substantially higher at 63% and only 37% of the total receipts were attributable to own work, whereas, in the preceding years, the proportion of own work was much more than the sub-
contracted work.
f) It is a matter of common knowledge that if the proportion of low margin business increases, then the overall profitability decreases and vice versa.
g) The amount of turnover during the year under consideration is highest in comparison to the preceding years. The increase in the amount of turnover itself justifies reduction in overall margin.
h) With overall net profit rate of 5.75%, the net profit works out to Rs.9,35,43,923/- which is more than the amount of net profit declared by the appellant in the last year at Rs.9,30,05,594/-."
6. Against the above order of CIT(A), both the assessee and the Revenue are in appeal before us.
7. The assessee has taken the following grounds:
"1. That on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer of invoking the provisions of section 145(3) of 7 the Act by rejecting the books of account without accepting the explanation offered by the appellant and without considering the fact that the regular and proper books of account are maintained and the same are audited u/s 44AB of the I.T. Act.
2. That on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the addition of Rs.81,24,513/- out of total addition of Rs.2,42,45,356/- by estimating the net profit @5.75% on total contract receipts of Rs.1,62,68,50,827/- without distinguishing the work done of his own and work given on sub-contract basis though it is material factor for determi8ning the actual net profit earned on total contract.
3. That under the circumstances of the case, charging of interest u/s 234C of Rs.2,92,149/- and u/s 234D of Rs.4,51,088/- is not justified.
4. That under the circumstances, initiation of penalty proceedings u/s 271(1)(c) is not justified.
5. That the appellant craves, leave to add, to urge, to alter or to amend any of the grounds of appeal on or before the date of hearing."
8. The Revenue has taken the following grounds:
"On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of Rs.1,61,20,844/- out of Rs.2,42,45,356/- made by the Assessing Officer on account of suppression of net profit."
9. It was argued by Learned A. R. that overall of net profit of 5.25% was offered by the assessee and which has been enhanced by CIT(A) to the extent of 5.75%. The contention of Learned A.R. was as under:
"At the outset the analysis of net profit chart is tabulated hereunder:
Net profit offered by Appellant A.Y. 04-05 05-06 06-07 07-08 08-09 Own work (%) 6 2.96 8.79 9.37 7.37 Contract work (%) 4 4 4 4 4 Overall N.P.** 5.85% 3.39% 5.47% 6.45% 5.25% **varies with the proportion of work and subcontract work 8 Net profit rate applied/upheld by I.T.A.T. for earlier year A.Y. 04-05 05-06 06-07 07-08 Own work 6% 6% 6% Overall N.P.6.50% Contract work (6.45% offered) 4% 4% 4% It may be appreciated that as against 6% N.P. rate held by Hon'ble I.T.A.T. in earlier years on own work, actual net profit is higher at 7.37% therefore any addition in respect of own work is unwarranted and the appellant prays that it be deleted.
It is also evidence that net profit in respect of sub contracted work is offered at 4% which is in line with the rate upheld by Hon'ble I.T.A.T. in its earlier years.
Accordingly, it is humbly submitted that the order of Learned Assessing Officer and CIT(A) be quashed and additions be deleted."
10. On the other hand, the Learned CIT, D.R. argued that in the immediately preceding assessment year 2007-08, after discussing in detail all the facts, the Tribunal vide order dated 15/02/2012 has applied the net profit of 6.50%, accordingly CIT(A) was not justified in reducing the net profit rate to 5.75%. Therefore, it was pleaded that the order passed by the Assessing Officer should be upheld.
11. We have considered the rival contentions, carefully gone through the orders of the authorities below and found from the record that the assessee was carrying civil contract work in Irrigation Department and other Government departments. During the assessment year under consideration, on the contract receipt of Rs.162.68 crores, the assessee had shown net profit of 5.24%. During the course of scrutiny assessment, the Assessing Officer found that net profit shown by the assessee was substantially low as compared to the net profit shown in the earlier 9 year. As per the Assessing Officer, even after increase in turnover by 18.50 crore, during the year under consideration, the net profit of the year under consideration has declined by more than Rs.76 lakhs. On examination of the books of account, various discrepancies were found by the Assessing Officer which have been discussed herein above. By invoking the provisions of section 145(3) of the Act, the Assessing Officer has rejected book results and estimated profit on own contract and sub-contract @8% and 6% respectively. After considering the assessee's submissions and the findings recorded by the Assessing Officer, the CIT(A) has upheld the action of the Assessing Officer for rejection of books of account. In view of the defects pointed out and the discussions made by the Assessing Officer and CIT(A) in their respective orders, we are in agreement with the finding of CIT(A) for upholding the rejection of books of account. Now coming to the estimation of profit as shown by the assessee during the year keeping in view the work undertaken by the assessee as a main contractor as well as sub-contractor, we found that on similar facts, the assessee was before the Tribunal in the immediately preceding year 2007-2008 wherein the Tribunal has upheld the net profit rate of 6.5% in its order dated 15/02/2012. Following is the precise observation of the Tribunal:
"7..........However, on merit of addition, the Learned CIT(A) found that on the similar facts in earlier year, the Tribunal in assessee's own case has upheld the net profit rate of 6% in the assessment year 2004-05. Since during the year under consideration, the assessee himself has shown net profit rate of 6.45%, the CIT(A) applied net profit rate of 6.5% and computed profit at Rs.9,37,17,380/-, as against net profit of Rs.9,30,00,580/- shown by the assessee. As the CIT(A) has already taken into consideration the order of the Tribunal in assessee's own case on the similar facts and also taken the fact of rejection of books of account under consideration, applied the more 10 appropriate rate of net profit at 6.5%, thereby retaining addition of Rs.7,16,800/-, we do not find any infirmity in the order of CIT(A)."
12. The facts and circumstances during the year under consideration are the same as in the assessment year 2007-08 decided by the Tribunal, except the fact that during the year under consideration there was increase in turnover by Rs.18.50 crore and slight change in the work undertaken as main contractor and sub- contractor. Increase in turnover can be achieved by the assessee only on sacrifice of marginal rate of net profit. Keeping in view the totality of facts and circumstances of the case vis-a-vis order of the Tribunal in the immediately preceding assessment year 2007-08 dated 15/02/2012, having similar facts, and giving due benefit to the assessee for increase in turnover and the quantum of work undertaken by the assessee as main contractor and as sub-contractor, we modify the net profit rate to 6.25% as against profit rate of 5.75% estimated by CIT(A). Accordingly, Assessing Officer is directed to compute the profit by applying net profit rate of 6.25% on the gross contract receipts. We direct accordingly.
13. In the result, the appeal of the assessee is dismissed whereas the appeal of the Revenue is partly allowed.
(Order was pronounced in the open court on 17/04/2013) Sd/. Sd/.
(JOGINDER SINGH) ( R. C. SHARMA ) Judicial Member Accountant Member Dated:17/04/2013 *CL Singh