TaxTMI 
TaxTMI 
2020 (11) TMI 745
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....gainst the facts and circumstances of the case. 3. That the respondent craves leave to add or amend any grounds of appeal before the appeal is finally heard or disposed off. 3. During the course of hearing the Ld. Counsel for the Assessee at the very outset stated that he has the instructions not to press cross objection. 4. Ld. DR did not object if the cross objection is to be dismissed as withdrawn. 5. In view of the above the cross objection filed by the assessee is dismissed as withdrawn. 6. Now we shall deal with the appeal filed by the Department in ITA No. 291/Chd/2019 for the A.Y. 2014-15 wherein following grounds has been raised: Whether on the facts and circumstances of the case, the CIT(A) was justified in reducing the calculation of net profit rate @6.5% on the total receipts instead of 12% applied by the AO when the site-wise expenses of labour, proof of address and identity of the labourers, genuineness of labour expenses was not established. ii) Whether on the facts and circumstances of the case, the CIT(A) was justified in allowing depreciation claimed by appellant on the profit arrived at by applying net profit rate of 6.5% on....
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....ound posted over the signature, address of the labourer were missing and all the labourers were not registered for PF & ESI. 8.3 The A.O. asked the assessee to show cause as to why expenses related to wages and salary be not added to its total income as bogus expenses. In response the assessee submitted as under: As regards disallowances of all the wages it is submitted that the assessee is covered under Employees Provident Fund as well as covered under the different labour law applicable to the organisation. The company has deducted and deposited provident fund of the employees as per the law applicable. The assessee is engaged in the construction of Roads and it is not possible to construct the Road without labour. So disallowance of wages is against the law and unjustifiable. The assessee has already provided the payment of salary & wages to staff and workers. As the record has been submitted in original and the same has been impounded so you are requested to provide the copy of the record, so that the information asked by your good self can be provided. 8.4 The A.O. observed that the failure on the part of the assessee to provide site wise expenses, labo....
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....ose grounds of appeals are as under and before we deal with such grounds of appeals, it is important to give the brief background of the case:- 1. The assessee, a Limited company, is engaged in the business of taking contracts of Road Construction at different places in Punjab from the Govt, department and these contracts are taken under stiff competition and for which, the tenders are floated by the respective Govt, departments and such contracts are then allotted to the persons quoting the lowest amount as per the norms of the Govt. department. 2. The assessee had been filing his returns of income year after year and there has been no dispute with regard to the same and the assessments have been framed both u/s 143(3)/143(1) and there has been no addition on account of 'estimation of profit rate' and, whatever, the profit have been declared in the returns of income year after year, the same have been accepted by the department, which is as per following chart:- A.Y. ASSESSMENT FRAMED 2010-2011 Assessment made u/s 143(3) 2011-2012 Assessment made u/s 143(3) 2012-2013 Assessment made u/s 143(3) 2013-2014 Assessment made u/s 14....
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....11,93,11,378.00 70,46,15,556.00 16.93 2013-14 10,57,96,402.00 68,97,76,267.00 15.34 2014-15 10,24,22,572.00 48,29,86,287.00 21.21 2015-16 10,90,45,060.00 74,28,25,761.00 14.68 9. From the above chart, your goodself would appreciate that in the earlier years, starting from Asstt. Years 2010-11 to 2013-14, the percentage of wages in different years have been ranging from 15.35% to 25.80%, and during the year consideration, such percentages have been 21.21%. The increase and decrease in the expenses of wages is on zcount of various reasons because at times, the contracts are taken under stiff competition, for which, the lower rates are quoted and at times the particular contract has to be completed within stipulated time and, as such more and more labourers are required for timely completion of contract and due to which, the expenses on labour are more or less in particular year. But one thing is essential that the labour is essential part of the business. It is also pertinent to mention here that, though our percentage of expenses compare favorably well with the past years, but with regards to percentage of expenses in Asstt. Year 20....
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.... could be made during the year under. 12. The another reason for rejection of books of accounts with regard to sitewise expenses as debited to profit and loss account and the labourers have not been maintained, it is very humbly submitted that at one given point of time, there are about 8 to 10 sites at various interval of times and at times, the labourers are shifted from one site to another site, depending upon various factors and such labourers are not fixed for particular site and due to the nature of business and modus operandi, it is practically not possible to maintain site-wise expenditure of the material and the labour and, as such, there was no justification in rejecting the books of accounts on such allegation. Further, at times, one particular contract has to be completed within stipulated time and due to which, the labour is shifted from one site to another. 13. As regards the labourers not being covered under provident fund and ESI, it is submitted that Provident fund and ESI are applicable, i f under particular wages are paid more than the prescribed limit and, wherever, the provident fund and ESI is applicable, the same have been complied with and ....
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.... alongwith copies of account of the parties, which proves that some of advances were received back immediately in next year and further the total 'Reserves and Surplus' were to the tune of R s . 11,44,97,465 as per balance sheet, being enclosed herewith and the total advances during the year under consideration for non-business purpose were to the tune of Rs. 7.00.000 as per allegation made by the Assessing Officer and, thus, as per the judgment of M/s Bright Enterprises Pvt. Ltd., reported in 381 ITR 107 and others, no disallowance of interest could be made and also the same ground cannot held good for rejection of books of accounts. However, for your goodself's reference we are tabulating hereunder the details of the advances which have been alleged to be unexplained by the Ld. AO:- SL Name of party Amount Remarks 1. Zigma Knitwears 15,00,000 Interest have been received by the assessee against such advance 2. Cosmos Research Lab Ltd. 7,00,000 Non-business Purpose 3. Indovast International 3,20,000 Amount adjusted against rebate and discount 4. Leotronic Scales Pvt. Ltd. 59,578 Adjusted against purchases 5.....
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....nk and other interest). With regard to the same it is submitted that the interest income earned in the form of bank interest and other interest are incidental to attainment of the main objectives of the assessee Company as many a times keeping the security in the form of FDR's or other deposits are necessary for the execution of the contracts. Moreover, the assessee does not keep the deposits for the purposes of the earning of interest from the same but for the execution of the contracts only, therefore, earning of interest on the same is incidental to the running of the business of the assessee and hence, the same is to be added in the income of the assessee while calculating the rate of net profit, However, even for the sake of argument we are to calculate the operating profit of the assessee by deducting the interest income from the same, even then it is very much appreciative that the net profit of the assessee before depreciation and bank interest expenditure are higher in the relevant assessment year as compared to previous assessment years and there is an increase from 11.95% to 14.84% in the net operating margin before interest and depreciation and the same is clear fro....
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....mation of 12%o rate of profit cannot be sustained. 23. Your goodself's attention is also invited to the following judgments of Punjab & Haryana High Court, wherein the profit rate of 4% to 6% have been held to be justified going by the past history of the case, this profit has been held to be justified after considering the judgment in the case of Sh. Prabhat Kumar Contractor, which has been cited by the Assessing Officer. 24. The reliance is being placed on the judgment of the Punjab and Haryana High Court in the case of The CIT vs Parveen Mittal reported in ITA No. 272 of 2011, wherein the Hon 'ble High Court has upheld the decision of the Hon'ble Jurisdictional bench of the Tribunal, that even i f the assessee has not produced the books of account during the assessment proceedings or during the appellate authorities, the assessment could not be made by adopting a higher rate of gross profit of 12% applied by the department and hence the rate of profit of 4% was upheld by the Tribunal, was confirmed by the Hon 'ble High Court. 25. Further, the jurisdictional Bench of the ITAT in the case of Sukhwinder Singh vs JCITas reported in 1461/CHD....
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....re for non business purpose, so the findings A. O. are correct. Para 18 The assesse neither submitted bank statements then, nor now, so the books of accounts were rightly rejected. Para 19 Books of accounts have been rejected on the basis of reasons given in the assessments order not on baseless allegations. Para 20 The 12% Net Profit Rate is Fully Justified keeping in view case law relied upon in assessment order. Para 21 to 25 : The assesse has not furnished copy of judgements relied upon by him. Moreover he has also failed to state how the facts of cases relied upon are similar to his case. 9.2 The aforesaid reply of the A.O. was forwarded by the Ld. CIT(A) to the assessee for its comment in resonse the assessee submitted as under: "With regard to the captioned subject we have filed detailed submissions before your goodself along with the detailed paperbook to justify the said submissions. Against the said submissions the Ld. AO has given comments vide letter dated 21.02.2018. With regard to the same at the outset it is submitted that the comments given by the Ld. AO are merely the reiterations of the assessment order and ....
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....tically not possible to maintain site-wise expenditure of the material and the labour and, as such, there was no justification in rejecting the books of accounts on such allegation. (iv) The records that were required during the assessment proceedings were being duly filed by the assessee except for few documents and the reasons for which have been clarified and explained as above. (v) Lastly, we have duly provided the performance certificates issued by the different departments to the assessee in respect of the work done during the relevant assessment year. Moreover, no adverse comments have been given by the Ld. AO on the same, therefore, it is not the case that the work done by the assessee have been disputed, rather the same has been accepted by the Ld. AO. Thus, when the work done has been accepted then, it is also agreeable that the expenditure on the wages have been incurred as wages are the major expenditure in the industry in which the assessee operates. The discrepancy noticed by the Ld. AO are merely mechanical in nature and 'he same are bound to occur in such an industry where the labour work force are so much unorganized and where the majority of ....
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....g the books of accounts as unreliable and rejecting it. The assessee has sufficient amount of interest free funds at the end of the relevant assessment year, therefore, no adverse inference with regard to the same can be drawn with regard to the reliability of the books of accounts. 5. With regard to the allegation that the assessee has not provided the bank statements during the assessment proceedings it is submitted that the bank accounts of the assessee were duly shown in the audited books of accounts of the assessee and the same has been clarified during the course of the assessment proceedings also and no adverse inference with regard to the same was noticed by the Ld. AO. However, for your ready reference we are producing herewith the copies of the same for your ready reference. 6. The Judgment of Parbhat Kumar contractor is not at all applicable on the case of the assessee because in the case of Parbhat Kumar the facts were entirely different and in our case, the regular books of accounts have been maintained and which have duly been audited and all the works have been executed which are of different Govt, department and no case has been made out that the a....
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....ets of judgment set along with the set of submissions. 9. Further, in Para 20 of the detailed submissions already filed by us, we have duly submitted that the interest income earned in the form of bank and other interest are incidental to attainment of the main objectives of the assessee as many a times keeping the security in the form of FDR's or other deposits are necessary for the execution of the contracts. However, no adverse remarks have been given by the Ld. AO against the same. Moreover, in our case the FDR's have been prepared by the bank as a security against the letter of credit issued by the bank and the other interest income earned by the assessee are from the debit balances of the directors which makes it even more clearer that the interest income earned by the assessee are incidental to the business. Therefore, considering the same it is clear that the net profit declared by the assessee are from operating sources only and addition i f any to be made has to be made while taking into account such operating profits. 9.3 Ld. CIT(A) after considering the submissions of the assessee and the report of the A.O. observed that the A.O. applied the net prof....
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....% on the contract receipt and on FDR's interest by observing in para 4.8 & 4.9 of the impugned order which read as under: 4.8 I have also looked into the chart of net profit declared by the assessee and it seen that this year the net profit rate of 6.36% compares favourably well the net profit rate of 6.01% and 5.87% for Asstt. Year 2013-14 and 2012-13. Thus, the net profit rate is higher in this year, but still I feel that ends of justice shall be met, if the net profit rate of 6.5% is applied on the contract receipts and on FDRs interest, since the earning of FDR interest is incidental to the carrying of the contract business as the FDRs have been given to the Govt, departments as security for the execution of the contract. However, the other interest, which has been disclosed to the tune of Rs. 1,40,38,722/- is to be assessed as 'income from other sources u/s 56,' since the said interest has no relation to the contract business. 4.9 The above finding of assessment of interest income from contract business, is based on the judgment of Karnataka High Court in the case CIT Vs Hewiett Packard Global Soft Ltd., as cited 'supra' and, thus, the Assessi....
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....oks of account mentioned by the assessee. It is well settled that in case the books of accounts are rejected the only way to work out the income is the application of gross / net profit rate on the turnover or receipts of the assessee. However the net profit rate to be applied should be reasonable and the past history of assessee's own case is to be considered. 13.1 On a similar issue the Hon'ble Supreme Court in the case of CIT Vs. Laxminarain Badridas reported in 5 ITR 170 held as under: "The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily b....
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.... the fact that the interest have been paid primarily to the bank to the tune of Rs. 3,68,20,164/- for certain overdrafts limits and for depreciation, the complete particulars have been given in the audited balance sheet and for which, the Ld. Assessing Officer had not raised any doubt. The total depreciation claimed has been to the tune of Rs. 1,48,84,802/- and the fact that the depreciation is to be allowed, even if the "net profit" is applied, is a settled issue by the judgment of Hon 'ble Punjab & Haryana High Court as under:- i). CIT Vs Chopra Bros. India (P) Ltd. P&H High Court as reported in 119 Taxman 866, in which, the Hon 'ble High Court has held as under:- "Section 145, read with sections 32 and 119, of the Income-tax Act, 1961 -Method of accounting - Estimation of profits - Assessment year 1988-89 - Whether in all cases (relating to period prior to 1-4-1994) where best judgment assessment is made by fixing a rate of net profit, assessee's claim for deduction on account of depreciation cannot be deemed to have been considered and it has to be separately taken into account provided prescribed particulars have been furnished b....
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....r is accordingly directed to allow these claims in relation to the assessment year under consideration after verifying the factual details." In this Judgment also, the judgment of Allahabad High Court in the case of Bishambhar Dayal & Co. has been relied upon. 16.1 Ld. CIT(A) after considering the submissions of the assessee directed the A.O. to allow the claim of the assessee for depreciation by observing as under: "4.10. As regards the depreciation is concerned, it is a settled law that wherever, the net profit rate is applied, the depreciation has to be allowed as per the various judgments of Hon'ble Punjab & Haryana High Courts and others, since all prescribed particulars are available in the record of the Assessing Officer and, as such, the depreciation claimed to the tune of Rs. 1,48,89,912/- shall be allowed by the Assessing Officer on the profit arrived at by application of net profit @ 6.5%." 17. Now the department is in appeal. 18. The Ld. CIT DR submitted that while framing the assessment the A.O. considered the income offered by the assessee in the return of income, therefore the claim of the depreciation has already been allowed by the A.....
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..... The assessee impudently refused that they do not belong to him. But actually he has no explanation to of fer on this unaccounted expenditure. ii) The bills which are unaccounted are of construction material like Sand, Crusher , labour expenses & are in the name of asses see. They belong to assessee as they are found in his premises. iii) Smart fleet card is in the name of M/s Ceigall India Ltd and is issued by Bharat Petroleum Corporation Ltd (a central government public sector under taking). It is a mode of payment just like cash and where i t can be recharged in cash and the fuel can be purchased. The assessee has again denied its owner ship which is false. iv) The assessee has said these documents do not belong to him because someone might have left it there but there is no reason for that why any "body would do that. Actually, the assessee was caught unaware when survey -was conducted at his premises . v) The assessee has been provided Xerox of all impounded document s and as a time buying & delaying tactics the asses see keeps on asking Xerox copies of impounded material . The intent ion of asking Xerox copies again and again does....
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....the Petrol Pump owner for other purpose and, as such, no addition could be made on account of such 'smart fleet', recharge to the tune of Rs.. 27,40,000/- 27. Lastly, it is submitted that the Ld. Assessing Officer has made addition of Rs. 84,19,383/- u/s 69 C is concerned, that addition itself is not sustainable in view of the fact that, when income has been estimated by the Assessing Officer by applying the net profit rate, then no separate addition on account of unexplained expenditure can be made and reliance is being placed on the following judgments:- i) CIT Vs Devi Prasad Vishwanath Prasad (1969) 721TR 194 (SC) ii) Indwell Constructions Vs CIT [232ITR 776] (AP) iii) CIT Vs Banwari Lai Banshidhar {229 ITR 229 (All). iv) Judgment of ITAT, Ahmedabad Bench in the case of Sh. Abdul Farid Khan vs ITO in ITA No. 1339/Ahd/2012 & CO No. 139/CAhd/2012. In the above said case, the rate of profit was applied and separate addition of indirect expenses were made to the tune of Rs. 11,96,547/- and it was held by the Hon 'ble Bench as under: - "6.2 Aggrieved by the order of CIT (A), Revenue is now in appeal before us.....
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.... Why would Petrol pump owner misuse assesssee's fleet card? What would be benefit of Petrol pump owner? & How are those recharge amount bills are available in assesse's premises. The assesssee is trying to serve the department a plethora of lies & vegue stories. So the submission of assessee be rejected & it is prayed before you to please confirm the addition made & pass a judgement in favour of revenue. 23.2 The aforesaid report of the AO was forwarded to the assessee for its comments by the Ld. CIT(A). In response the assessee submitted as under: On account of unexplained expenditures 1. With regard to the allegation of the Ld. AO that the assessee has denied the ownership of the bills found in his premises it is submitted that this allegation of the Ld. AO is not at all correct as the assessee has only denied the ownership of the bills that has not been issued in the name of the assessee. The additions have been made on the basis of the Annexure-12, Annexure-Al and Annexure-A3. Whereas, the assessee has merely denied the ownership of the documents mentioned in A-l which does not bear the name of the assessee. The same....
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....nataka High Court in the case of CIT Vs Hewlett Packard Global Soft Ltd., wherein, the Hon'ble High Court has held as under: "Income Tax Act, 1961, Section 10A and 10B - Deductions of income from profits and gains of business of export - Assessee is 100% export oriented unit - During AY 2001-2002, it earned interest income, on Short Term Deposits from banks in India, by advancing loans to staff and also income out of its Surplus Funds temporarily parked in the Current Account held in Citi Bank, Hong Kong Assessee since had claimed deductions U/s 10A and 10B of the Act, AO held that such interest income was not entitled to 100% deduction U/s 10A but taxable U/s 56 of the Act, as "income from other sources" and this is the bone of contention between the assessee and the Revenue in this appeal - Karnataka High Court decided the issue in f/o assessee respondent holding that assessee is entitled to 100% exemption or deduction under Section 10A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxab....
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....e-construction material is delivered by the party concerned at different sites and someof the materials are not upto the mark and the same having not been approved-is returned back. However, the relevant vouchers for the same were lying with the assessee had not been entered in the books of accounts, since no material was purchased. Thus, it has been stated that these are only rough memoranda of records and no addition could be made on account of such documents. It has further been pleaded without prejudice to above documents that addition itself is not sustainable, when the income has been estimated by the Assessing Officer by applying the net profit rate, then no separate addition on account of unexplained expenditure can be made and for that the reliance has been placed on the judgments of Hon'ble Supreme Court and other High Courts for this preposition as cited 'supra'. 4.13 I have gone through the assessment and detailed submissions of the assessee and have also perused the record. The submissions of the Ld. Counsel of the assessee has been considered and after going through the record, it is held that since I have already held that this is a fit case for ....
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.... the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases made by the assessee." 26.2 A similar view has been taken by the Hon'ble Andhra Pradesh High Court in the case of Indwell Constructions Vs CIT reported in 232 ITR 776 held as under: "The pattern of assessment under the Income-tax Act, 1961, is given by section 29 which states that the income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act. Section 40 provides for certain disallowances in certain cases notwithstanding that those amounts are allowed generally under other sections. The computation under section 29 is to be made under section 145 on the basis of the books regularly maintained by the assessee. If those books are not correct or complete, the Income-tax Officer may reject those books and estimate the income to the best of his judgment. When such an estimate is made, it is in substitution of the income that is to be computed under section 29. In other words all the deductions which are referred to u....