Income Tax Appellate Tribunal - Ahmedabad
Super Construction, Mehsana vs Assessee on 28 January, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH - AHMEDABAD
(BEFORE S/SHRI BHAVNESH SAINI, JM AND A. N. PAHUJA, AM)
ITA No.981/Ahd/2008
A. Y: 2005-06
M/s. Super Construction Co., Vs The Income Tax Officer,
10, Sahajanand, Ward-2, Mehsana
PO Mehsana
PA No. AAFFS 9357P
(Appellant) (Respondent)
Appellant by Shri J. M. Trivedi, AR
Respondent by Shri M. K. Mahesh, DR
ORDER
PER BHAVNESH SAINI: This appeal by the assessee is directed against the order of the learned CIT(A), Gandhinagar dated 28-1-2008 for assessment year 2005-06 on the following grounds:
1. That the learned A. O. erred in making addition of Rs.4,47,817/- by resort to section 40A (2) (b) by adopting G. P. of 10.95% as against G. P. of 8.55% declared by appellant and learned CIT(A) erred in directing to add 1% more N. P. over and above income declared by the assessee.
2. The defect pointed out by A. O. do not appear to be in the nature of defects in accounts/omission etc. but is in respect of some work allotted to person u/s. 40 A (2) (b)
3. The estimate of N.P. by learned CIT(A) being on higher side, it is requested to be deleted or substantially reduced.
4. That while estimating income, both the authorities have erred in not appreciating properly the facts of the case, nature of business as well as explanation furnished by the appellant".ITA No.981/Ahd/2008 2
Super Construction Co. Vs ITO 2, Mehsana
2. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material on record.
3. The AO made the addition of Rs.4,47,817/- on account of estimation of gross profit at 10.95% on the turnover declared by the assessee by primarily focusing on the sub contract account to 4 persons covered u/s 40A (2) (b) of the IT Act. On perusal of the assessment order reveals that the AO trying to locate the reasons for fall in gross profit rate during the year identified the payments made to the following 4 sub contractors covered u/s 40A (2) (b) of the Act:
Sr. Name of sub contractors Relationship Amount of sub No. contract
1. Amit Jayantilal Patel Son 925870
2. Babulal Ambalal Patel Brother 1103146
3. Mahendrakumar K. Patel Cousin brother 812300
4. Pravinkumar S. Patel Cousin brother 956785 The AO also made inquiries of the mode of payment to the contractors, and recorded their statements and found out various infirmities in the contract as well as the dealing of the assessee with them for which he issued show cause notice. The AO found that the sub contractors did not have infrastructure to carry out the work and the assessee did not charge sums for the facilities offered to the sub contractors like use of centering materials etc. as was required by the sub contractors. Further, the AO noted that the sub contractors have worked with any other contractor and had no previous experience of taking such contracts and they had not maintained any books of account. It was further noted by the AO that on inquiry from the banks that the cheques issued by the appellant were encashed either by the partners of the appellant or by somebody of the appellant firm and not by the sub contractors and thus, ITA No.981/Ahd/2008 3 Super Construction Co. Vs ITO 2, Mehsana the AO treated the sub contracts as sham arrangement of the assessee with a view to reduce the tax liability. Accordingly, the AO rejected the book results and applied gross profit rate of 10.95% being average of last 3 years and made the addition of Rs.4,87,817/-.
4. The addition was challenged before the learned CIT(A) and it was briefly explained that the assessee is a partnership firm carrying on the business of construction since 24-5-1987. Gross receipts in the assessment year under appeal are Rs.1,96,87,311/- as against the gross receipts in the preceding assessment years at Rs.1,03,45,716/- and Rs.74,93,426/- in the assessment year 2004-05 and 2003-04 respectively. The nature of contract receipts for the relevant year was in respect of several constructions of ring foundation and road metaling work of ONGC and work of high tank and pipe line for irrigation of water supply Board and Narmada Nigam. The contract work for previous year was in respect of high tank and pipe line only. Due to change in nature of contract work the gross profit rate was reduced from 10.89% to 8.55%.
Due to increase in the volume of work, sub contracts were given to the persons covered u/s 40A (2) (b) of the IT Act as mentioned above. The sub contractors in their statements stated that the work is carried out by them for the assessee and detailed reply is filed in this regard. However, the AO was not satisfied with their experience and qualification or infrastructure to carry out the activities and withdrawals of amount from the bank by self cheques. The AO accordingly rejected the book results of the assessee u/s 145(3) of the IT Act. It was explained that merely because relatives have completed the work on behalf of the assessee is not ground to reject the book results. All the contractors are assessed to tax and have their PAN, payment made to them is not also disputed. None of them has stated in their statement that they have not worked for the assessee. There was no evidence that the amount withdrawn by them from their account was returned to the assessee. The identity of the sub ITA No.981/Ahd/2008 4 Super Construction Co. Vs ITO 2, Mehsana contractors is proved and the payment to them is also not in dispute. They have also accepted that they were doing sub contract work even in the earlier years. It was explained that because of non-insistence of any terms of agreement considering the long term business prospects, agreement would not become sham or bogus. It was explained that the sub contractors received only part amount as against the maximum work of the contract. Due to increase in the turnover same infrastructure cannot be enough. Additional work is required. Since the turnover of the assessee has increased as compared to the other years, therefore, estimation of net profit by higher amount is not justified. It was submitted that when books of accounts are rejected, estimation of the profit is to be made by applying net profit rate. It was submitted that though gross profit is reduced by 2.04%, the net profit is reduced by 1.02% only. Therefore, the justified method for estimating the income would be of applying the net profit rate. It was further explained that business always takes interest in increasing addition in absolute profit. Percentage is not important. So, reduction in the percentage of net profit is due to additional contract receipts, so addition on the ground of low profit is not justifiable. The assessee also filed affidavits of all the sub contractors confirming that they have worked as sub contractor for the assessee company and have received consideration for the work done and having also got back the cash withdrawn from the bank. The learned CIT(A) considering the submissions of the assessee accepted the alternative contention of the assessee with regard to application of net profit rate and ultimately directed the AO to apply net profit rate of 1% over and above what has been declared by the assessee on total receipts. His findings in Para 3 to 3.3 are reproduced as under:
3. The matter has been given serious consideration.
To start with, there is this technical issue of appellant filing affidavits of subcontractors before the undersigned. Affirmation of the affidavits are on the same aspects which ITA No.981/Ahd/2008 5 Super Construction Co. Vs ITO 2, Mehsana have been stated by these subcontractors before the Assessing Officer during the statements recorded u/s 131, except for one new aspect, namely that the cash withdrawn by the appellant or his agents had been handed over to them. On being asked whether there existed any reasonable cause for not making such a statement before the Assessing Officer, either in the form of affidavit or otherwise, the Authorised Representative could not provide a satisfactory answer. Therefore, these affidavits to the extent they contain fresh evidence/assertions, are not accepted.
3.1 Coming to the substantive issue of addition, although the Assessing Officer has rejected the entire books of account, the matter primarily is in the domain of section 40A (2)(b). While on the one hand I will generally agree that the appellant seems to have some kind of arrangement with these subcontractors which affects the tax liability of the appellant, when it entered into contracts with these subcontractors, it would be difficult to come to the conclusion that the entire payments made to the appellant's subcontractors were bogus in nature. The Assessing Officer's comments in the assessment order at various places, after his analysis of the statement recorded also seems to point to the fact that the work stated to be given to these contractors have been done by the firm only. If it is an issue covered u/s. 40A(2) (b), then the matter is primarily of excess payment.
3.2 The appellant seems to have some explanation for all in gross profit rate because there has been very substantive increase of turnover from about 1.03 crores in the preceding year to about 1.96 crores in this year and there has also been a change in the nature of the contract undertaken. It has diversified into ring foundation and road metaling work of ONGC along with the high tank and pipeline work for irrigation Department, Water Supply Board and Narmada Nigam, compared to only the later category of work in the preceding year. The fact that during the year, the appellant has shown lesser labour expenses of Rs.26,41,352/- on a turnover of about Rs.1.96 crores compared to Rs.3,96,875/- on a turnover of Rs.1.03 crores in the preceding year and there has been an additional expenditure of sub-contract expenditure of Rs.66,79,223/- i0n this year, would also show the appellant's more reliance on the subcontract work. The Authorised Representative's argument that while comparing the results in the case of a contractor, the net profit should be ITA No.981/Ahd/2008 6 Super Construction Co. Vs ITO 2, Mehsana compared, also merits attention. It is said that while the gross profit for the year has decreased by about 2.05% but the net profit (before partners' interest, partners' remuneration, etc) has reduced only by Rs.1.02%. The appellant had given the working of the net profit before the Assessing Officer. As per this working, if the net profit is considered before depreciation, partners' interest/remuneration etc. the same has decreased by 1.3% compared to previous year. It must, however, be noted that the appellant's gross profit and net profit (computed in any manner), in absolute numbers is much higher than the previous year due to much larger turnover.
3.3 Therefore, considering all the aspects, I have come to the conclusion that the appellant's declared results needed to be estimated. However, appropriate issue of comparison is the net profit rate before depreciation and interest. Since such net profit has been in the region of 6% in the previous years and the same has been declared at 4.9% in this year, in my view the ends of justice shall be made in case we apply net profit rate of 1% over and above what has been declared by the assessee on the total receipts. The Assessing Officer may re-compute and give the appropriate relief to the assessee".
5. The learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that there was a change in the construction work in the assessment year under appeal. Due to this reason, more work was assigned to the sub contractors and as such there was fall in gross profit rate. He has submitted that however, turnover of the assessee is enhanced as compared to the earlier years. He has submitted that the AO has rejected the book results by resorting to the provisions of section 40A (2) (b) of the IT Act, however, no specific defect has been pointed out in the maintenance of the books of account. He has submitted that in nutshell the learned CIT(A) retained the addition of 1% i.e. Rs.1,96,893/- from the addition of Rs.4,47,817/-. The learned Counsel for the assessee relied upon the decision of ITAT Chandigarh Bench in the case of Micro Instruments Co. Vs ITO 12 DTR 501 copy of which is filed on record. However, the learned Counsel for ITA No.981/Ahd/2008 7 Super Construction Co. Vs ITO 2, Mehsana the assessee admitted that the assessee has not raised any ground of appeal before the Tribunal as regards confirmation of the finding of the AO with regard to rejection of the book results u/s 145 (3) of the IT Act. On the other hand, the learned DR relied upon the orders of the authorities below and submitted that the learned CIT(A) has already granted sufficient relief to the assessee, therefore, no further inference is required in the matter.
6. We have considered the rival submissions and the material available on record. The AO considered the case of the assessee for estimation of the book results because there was fall in the gross profit particularly with reference to sub contracts assigned to the sub contractors who are falling in the category of specified person u/s 40 A (2) (b) of the IT Act. The finding of the AO was depend upon the outcome of the findings given u/s 40A (2) (b) of the IT Act, because the AO was of the view that the sub contractors have no required experience, qualifications or infrastructure facilities to carry out contract activities. Show cause notice was given to the assessee as to why book results be not rejected u/s 145(3) of the IT Act. The AO considering the explanation of the assessee rejected the book results of the assessee and estimated the gross profit at 10.95% for the purpose of making the addition of Rs.4,47,817/-. ITAT Chandigarh Bench in the case of Micro Instruments Co. (supra) held as under:
"Held: Sec. 145(3) empowers an AO to reject the trading results declared by an assessee. If the AO is not satisfied about the correctness of completeness of the accounts maintained by the assessee or where the method of accounting as notified is not followed by the assessee, the AO is empowered to reject the results so declared and make an assessment to the best of his judgment. None of the objections brought out by the AO is strong enough to negate the book results declared by the assessee. Firstly, with regard to the fall in GP rate, the assessee had furnished a detailed explanation. The assessee had explained the decrease in sale ITA No.981/Ahd/2008 8 Super Construction Co. Vs ITO 2, Mehsana price as also its reasons. The reasons were also substantiated on the basis of the sale bills of the respective years showing fall in the prices of finished products of the assessee. In fact, in its written communication to the AO, the assessee also pointed out that the fall in sale price was also a subject matter of examination by the excise authorities with no adverse findings. Further, the assessee explained the increase in expenses this year in comparison to the earlier years. In fact, the AO himself has admitted that the purchase price of the raw materials has risen during the year under consideration. Therefore, the explanation rendered by the assessee with regard to the fall in GP rate is plausible and could not be ground to reject the books of account. Similarly, non-reporting of transactions with a concern covered under s. 40A (2) (b) , at best can be attributed to the auditors of the assessee and cannot be a ground to reject the reliability of the account books. Further, with regard to the incurring of job work payments to the sister concern, the assessee had explained the reasons for making the payment. It has been explained that earlier the job work was being got done from outside parties and in view of the secrecy and confidentiality of the manufacturing process, the same was now being undertaken from the sister concern. It is submitted that no unreasonable expenditure has been incurred on job work payments to the sister concern inasmuch as it would have incurred such expenditure even if the job work was got done from other parties. There is no negation to the fact position that the work has indeed been undertaken for the assessee by the sister concern, MI Ltd. The assessee has explained even before the lower authorities the circumstances in which the payments have been made. There is nothing unreasonable in this regard. In any case, even for applying the provisions of s. 40A (2) (b), it is for the AO to make out a case that the expenditure incurred is excessive or unreasonable having regard to the fair market value of such services. No effort in this regard has been made by the AO. Therefore, considering the aforesaid, there is no justification for the AO to invoke the provisions of s.
145 (3) and reject the reliability of the account books maintained by the assessee. Thus, the addition made by computing the gross profit on estimate basis is hereby set aside".
7. However, considering the fact that the assessee has not raised any ground of appeal before the Tribunal challenging rejection of the book results by the authorities below, it will not be proper to interfere with the ITA No.981/Ahd/2008 9 Super Construction Co. Vs ITO 2, Mehsana orders of the authorities below with regard to rejection of the book results u/s 145 (3) of the IT Act. However, the facts noted above clearly prove that there was a difference in the nature of contract assigned to the assessee in the assessment year in question as compared to earlier years. The assessee has declared more turnovers as compared to the earlier year's turnover. This would be the reason for fall in the gross profit rate as claimed by the assessee. However, it was not appreciated by the authorities below. Similarly, non-reporting of the transactions with a concern covered u/s 40A (2) (b) of the IT Act, at the best can be attributed to the auditors of the assessee and cannot be ground to reject the version of the assessee. In any case, even for applying the provisions of section 40A (2) (b) of the IT Act, it is for the AO to make out a case that expenditure incurred is excessive, therefore, unreasonable having regard to the fair market value of the goods, services or facilities for which the payments are made or the legitimate needs of the business or profession of the assessee or the benefits derived by or accruing to him there from, or which of the expenditure as is considered by the AO to be excessive or unreasonable. However, no effort has been made by the AO to do so. It is also a fact that the main work assigned to the assessee under contract was completed by the assessee through the sub contractors. Even no specific defect has been pointed out in maintenance of books of account by the assessee. No sale and purchase has been found to have been made outside the books of account. Expenses are also not found to be made out of unaccounted money except the AO noted some infirmity regarding work experience etc. by the sub contractors i.e. persons specified u/s 40A (2) (b) of the IT Act.
8. Considering the facts and circumstances of the case and particularly when the assessee has not challenged the findings of the authorities below as regards rejection of book results, it would be reasonable and proper in the facts and circumstances of the case to ITA No.981/Ahd/2008 10 Super Construction Co. Vs ITO 2, Mehsana estimate income of the assessee reasonably. Hon'ble Privy Council in the case of CIT, Central And United Provinces Vs Laxminarain Badridas 5 ITR 170 held "that estimate of income should be fair. AO should not act dishonestly or vindictively. All knowledge, previous history, local knowledge and circumstances of the assessee to be considered to arrive at fair and proper estimation of income". The ultimate finding of the learned CIT(A) would be that addition of Rs.1,96,893/- is confirmed by him. However, considering the above discussions and contract and turnover as compared to the earlier year, in the light of the decision of ITAT Chandigarh Bench in the case of Micro Instruments Co. (supra), we modify the orders of the authorities below and restrict the addition in all in a sum of Rs.50,000/-.
9. As a result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 19-08-2010.
Sd/- Sd/-
(A. N. PAHUJA) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 19-08-2010
Lakshmikant/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad