TaxTMI 
TaxTMI 
2018 (7) TMI 2372
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.... 31.3.2009 as the assessee could not produce the creditors and nature of transactions with these creditors during the course of assessment proceedings." 2. Vide ground no. 1, grievance of the assessee relates to the deletion of addition of Rs. 41,66,066/- made by the AO on account of gross profit rate. The facts, in brief are that, the assessee filed the return of income on 25.9.2009 declaring an income of Rs. 16,21,010/- which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) on 30.3.2011. Later on, the case was selected for the scrutiny. During the course of assessment proceedings, the AO noticed that the assessee was asked to furnish the complete details of PAN, complete addresses, confirmation of the creditor, the contract agreement in respect of works undertaken, details of labour payments made whether on muster roll or through contractors and proof thereof. He further observed that the assessee had submitted details of the some of the creditors and was again asked to furnish the complete details of bills/vouchers in respect of expenses claimed in the profit and loss account which were produced and verified on test check basis....
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.... the project sites situated in remote and interior areas. The labour/manpower is employed from the surrounding villages of the project sites and they are normally illiterate and poor people who don't have bank accounts and work on cash payment basis only. This expenditure on account of wages/salaries has to be paid in cash. STAFF WELFARE That the expenses of staff welfare is incurred exclusively for tea and refreshment expenses provided to labour and other staff working at the project sites. This expenditure also involves payment of small amount to local supplier/vendor. FREIGHT AND CARTAGE That the expenses of freight and cartage has been incurred for transportation of constructions material from plant to work site through tipper trucks. As per the practice prevalent in the transporter community, truck drivers normally collect payments on delivery and in cash mode only because they have to incur expenditure on diesel, repairs, various taxes, food, etc in cash during the transit. That the total expense of freight and cartage of Rs. 22,78,004/- has been incurred through payments made to transporters namely, Rajender Kumar and Sahun Khan. Rs. 5,41,461/- had been paid ....
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.... of Rs. 28,52,484/- to the returned business income. Rejected the books of accounts: That the assessing officer in her show cause notice had stated that some expenses like raw material, wages, salary, staff welfare, freight and cartage had been made in cash and they were not supported by voucher/bills/invoices. That complete vouchers/bills/invoices along with books of accounts were duly produced before the A.O. during the assessment proceedings which had been duly confirmed by the assessing officer in her order. Further in the reply to the show cause vide covering letter dt. 29.12.2011, it was restated that the books of accounts were produced but the assessing officer failed to point out any discrepancies or shortcoming or defects in the books and details submitted during the assessment proceedings. That the assessing officer has herself admitted in her assessment order that Shri Manu Verma CA attended the Assessment proceeding from time to time and filed necessary information and details. The written submissions filed along with necessary documents and explanation were examined and placed on records. That the 'A"s affidavit contravening erroneous facts and observation ....
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....hod of accounting followed or adopted by 'A' and accepted by department for several years including acceptance in assessment u/s 143(3) and it was not established by the department that the method was such that profits could not properly be deduced, then the assessing officer was not entitled to reject the books of accounts. Our view gets support from the judicial pronouncement in the case of Commissioner of Income Tax vs. K. Sankarapandia Asari and Sons, High Court of Madras, decided on 1st July, 1980. d) That the assessing officer can't reject a system of accounting followed by 'A' uniformly and regularly over the years and which has also been accepted by the department. Our view gets support from the judicial pronouncement in the case of [A] Commissioner of Income Tax vs. Margdarshi Chit Funds (P) Ltd., High Court of Andhra Pradesh. e) That books of accounts maintained by 'A' could not be rejected because the assessing officer has failed to bring out nay positive defect in the method of accounting. Our view gets support from the judicial pronouncement in the case of J. A. Trivedi Brothers vs. Commissioner of income Tax, High Court of Madhya Prades....
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....accepted net profit. That most of the contacts executed by the 'A' are from the government departments. 'A' has to enter into a tender bid in order to obtain the contract. Due to stiff competition and competitive bidding through tenders, the margin of profit is very restrictive. The qualitative controls, specification of materials, regular inspection by the customer engineers doesn't allow to earn any super or bumper profit. That the tenders are floated by the government departments after comparing each and every item of cost against the prevailing market rates and then the estimated cost of the work of the tender is announced. Tenders are accepted only on the basis of lowest rates. This also leads to very low margin of profits. That by applying N. P. rate of 7% and disallowance of 50% of the sundry creditors, the assessing officer has assumed and assessed the G.P. rate @ 29.55% and NP Rate @ 19.32@ of gross Receipts. Such type of earning is absolutely impossible in this type of business of Govt contractors. That the assessing officer has filed to refer or quote any comparable case where the net profit @ 7% had been shown or assessed. Adoption of gross p....
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....ve any basis when the assessee has been adopting the same method of accounting which had never been rejected by the department. As regards to the adhoc addition by applying the 7% net profit rate, the learned CIT(A) observed that the assessee had nowhere accepted that an adhoc addition may be made. Therefore, the reasons given by the AO for rejecting the books of accounts and estimating the net profit @ 7% of turnover of the assessee lack any basis accordingly adhoc addition made by the AO was deleted. 6. Now the Department is in appeal. 7. The learned Sr. DR reiterated the observations made by the AO and strongly supported the assessment order passed by the AO. It was further submitted that the assessee has not given any explanation to the queries raised by the AO therefore, there was no alternative except to reject books of accounts and to determine the income by applying the net profit. 8. In his rival submissions, the learned counsel for the assessee reiterated the submissions made before the authorities below and further submitted that considering the nature of the business in which the assessee was engaged, there was no alternative except to make cash payments for petty ex....
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....plete details of sundry creditors PAN, complete addresses, confirmation of the creditors etc. According to the AO, the assessee failed to furnish the complete confirmations from those creditors for proving the genuineness of the transaction in the books of accounts. He disallowed 50% of the outstanding amount considering the same as bogus, non-existent and non genuine. Accordingly, addition of Rs. 80,65,117/- was made. 11. Being aggrieved the assessee carried the matter to the learned CIT(A) and submitted as under:- "That 'A' has sundry creditors of Rs, 1,61,30,235/- in the audited balance sheet as on 31st March 2009, The 'A' has 19 creditors as on 31.03.2009. During the assessment proceedings, the assessing officer had asked to file the confirmation of sundry creditors exceeding Rs. 5,00,000/-. The 'A' has 19 creditors amounting to Rs. 1,61,30,235/-, out of which confirmation of 16 creditors representing amount of Rs. 1,56,93,995/- (more than 97%) were filed from time-to-time during the assessment proceedings (detail of confirmation filed on different date, our covering letter dated 19.08.2011, 26.08.2011, 07.09.2011, 18.11.2011 and 24.11.2011.) That....
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....irmation filed from the side of sundry creditors. That the 'A' has duly discharged his onus by filing the confirmations from sundry creditors, with complete and desired particulars. That the 'A' was never asked by the Assessing Officer to produce the sundry creditors as alleged as mentioned by her in assessment order. There is no such noting on the order sheet as observed by the undersigned, while making inspection of assessment records post assessment. That the conclusion drawn by the assessing officer that 50% of sundry creditors are bogus, non-existent and non genuine is absolutely incorrect and without appreciating the confirmations filed and without going through the contents of the confirmations. Applying N.P. Rate of 7% and disallowance of 50% of the sundry creditors, the assessing officer has assumed and assessed the G.P. Rate @ 29.55% and NP Rate @ 19.32% of Gross Receipts. Such type of earning is absolutely impossible in the type of business of Govt. Contractors. Further alternatively when income is assessed on ad-hoc basis, by application of GP or NP rate, by rejecting the books of accounts, as done by the assessing officer, no additional disall....