DYNAMIC ENGINEERS INFRATEC PVT. LTD.,KOTA vs. ACIT CIRCLE-1 KOTA, CIRCLE-1 KOTA

PER BENCH :

These three appeals by the assessee are directed against three separate orders of ld. CIT (A) dated 6.3.2019, 26.03.2019 and 22.03.2019 for the assessment years 2010-11, 12-13 and 13-14 respectively. The assessee has raised common grounds in these three appeals except the quantum of addition and rate of Net Profit applied by the AO. The grounds raised for the assessment year 2010-11 are reproduced as under :-

2 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

“ 1. On the facts and in the circumstances of the case, the ld. Commissioner of Income Tax (Appeals) Kota erred in confirming the action of the AO by making addition of Rs. 1280062/- by estimating NP rate of 6.50% instead of NP rate of 5.19% shown in the audited books of accounts of his order dated 06.03.2019 arbitrarily. (Ground Number 1 of ground of appeal filed before CIT (A). 2. That the appellant craves to add, delete, alter and amend or modify any of the grounds of appeal either before or at the time of hearing.”

The assessee has also raised an additional ground for these three years which is also

common and reads as under :-

“ That AO was not justified in making addition of Rs. 12,80,062/- by invoking the provision of Section 145(3) of the Income Tax Act, 1961, particularly when the books of accounts maintained by the assessee are true and correct and true profit can be deduced there from. Learned LD. CIT Appeal also grossly erred in affirming the order AO.”

The hearing of the appeal was concluded through Video Conference due to the

prevailing situation of COVID 19 Pandemic.

First, we take up the additional ground raised by the assessee

challenging the rejection of books of account under section 145(3) of the Act.

material on record. The AO has pointed out various defects during the course of

3 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

scrutiny assessment which are enumerated in para 3 at page 2 of the assessment order

as under :-

“ During the year, the assessee company is engaged in the business of railway contract. Contract with Railways involves Foot Over Bridge (FOB), laying of new railway in Railway…

During the assessment proceedings, the following defects have been found in books of account.

i) When reconciling the TDS receipts, a TDS of Rs. 39,535/- (gross receipts 17,44,660) has not been related to the year under consideration. It was related to previous year, i.e. Assessment Year 2009-10. ii) On perusal of direct expenses, it is found that the following discrepancies were in the books of account of the assessee firm- a) Some purchase bills are not available and some payments were paid in cash. b) Consumable goods, site expenses are supported by self made vouchers. c) Expenses such as Mess, Stacking and cutting are supported by self made vouchers which are not verifiable in nature. d) Transportation and crane expenses are partly supported by third party vouchers. e) Site-wise consumption register not maintained. f) Labour charges- maintained only muster rolls sheets which are not verifiable nature.

4 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

In view of the above, books of assessee cannot be accepted and books of account are liable to reject. Therefore, the LD.AR of the assessee vide order sheet entry dated 08.03.2013 has been asked to show cause why books may not be rejected u/s 145(3).”

The assessee though explained the defects as pointed out by the AO but took the stand

that due to the reason of works executed at various sites, it is not practically possible to

maintain the details of consumable goods of each site and, therefore, the site-wise

consumption register is not maintained. The ld. A/R has fairly admitted that this

Tribunal in case of sister concern of the assessee, namely, Dynamic Engineers vs. ACIT in ITA No. 856, 857 & 858/JP/2019 vide order dated 31st December, 2019 has

considered an identical issue for the assessment years 2010-11 to 12-13 against the

assessee. At the outset, we note that this Tribunal has considered this issue raised by

the assessee in the additional ground regarding rejection of books of account under

section 145(3) in para 5 of the order dated 31.12.2019 in case of M/s. Dynamic

Engineers Vs. ACIT (supra) as under :-

“5. We have considered the rival submissions as well as the relevant material on record. The assessee is engaged in the railway contract work and filed its return of income on 28.09.2010 declaring total income of Rs. 1,75,49,603/-. During the scrutiny assessment, the AO asked the assessee to furnish the books of account as well as other details and supporting evidences. From perusal of the books of account and other

5 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

details filed by the assessee, the AO noticed various defects which are enlisted in para 3 of the assessment order as under :-

“ i) When reconciling the TDS receipts, a TDS of Rs. 39,535 (gross receipts 17,44,660) has not been related to the year under consideration. It was related to previous year, i.e. AY 2009-10.

ii) On perusal of direct expenses, it is found that the following discrepancies were in the books of account of the assessee firm-

a) Some purchase bills are not available and some payments were paid in cash.

b) Consumable goods, purchases of sand were made in self made vouchers.

c) Labour charges : assessee has submitted muster roll where only name of person is appearing and due to full particulars of labours, proper verification is not possible.

d) Expenses on mess, rail loading, stacking and cutting are also supported by self made vouchers which is not verifiable in nature.

e) Transportation expenses; some expenses were partly supported by third party vouchers.

f) Site-wise consumption register did not maintain.”

The AO accordingly issued a show cause notice dated 08.03.2013 to the assessee asking as to why the books should not be rejected under section 145(3) of the Act. In response, the assessee filed its reply on 11.03.2013 and contended that some of the expenses/purchases are supported only by self made vouchers due to the reason that these are petty cash purchases within the limit under section 40A(3) of the Act. It is pertinent to note that the assessee cannot take shelter under section 40A(3) of the Act to substantiate its claim of purchases and other expenses without

6 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

proper vouchers. Provisions of section 40A(3) are invoked irrespective of an expenditure otherwise not disallowed under section 37(1) of the Act. Therefore, this explanation of the assessee cannot be accepted when the AO has specifically raised the query about the supporting evidence in respect of various claims made by the assessee. The second explanation of the assessee is that the various expenditures were incurred at the remote sites of the assessee and, therefore, the proper vouchers were not available with the assessee but only self made vouchers were produced by the assessee in support of the claims. It is pertinent to note that the assessee is working as a Railway Contractor and, therefore, the claim of the assessee for incurring expenditure in the process of executing the contract work is required to be supported by proper vouchers. It is not a rare incident of small claim or only few expenditures but the AO has pointed out so many instances of the claim of expenses right from various purchases, consumable items, mess, rail loading, unloading, cutting expenses, transportation expenses. Therefore, when there is gross failure on the part of the assessee to produce the supporting evidence and it is not an isolated instance but it appears to be the claim on wholesale basis without supporting with proper vouchers, then the explanation furnished by the assessee that the assessee is executing the work at remote sites cannot be accepted. As regards the site-wise consumption register, the AO has expressed his inability to verify the correctness of the closing stock including work-in-progress due to non-availability of Site-wise Consumption Register. Even the assessee is not disputing this fact that it is not maintaining the site-wise consumption register and the closing stock including the work-in-progress is determined only on physical verification. Therefore, in the absence of the proper record of the consumption of material, the correctness of the closing stock of the assessee could not be verified by the AO. We further note that the AO has raised a specific

7 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

objection regarding TDS receipts not relating to the year under consideration but relates to the assessment year 2009-10 and when the assessee has not given any explanation on this objection, then having regard to the facts and circumstances of the case as discussed above, we do not find any error or illegality in the orders of the authorities below in rejecting the books of account by invoking the provisions of section 145(3) of the Act.”

Accordingly, in view of the decision of this Tribunal in case of assessee’s sister concern

engaged in the similar business activity, the additional ground raised by the assessee is

decided against the assessee.

Ground No. 1 is regarding the addition made by the AO while

estimating the income by applying N.P. rate of 6.5% instead of N.P rate

declared by the assessed at 5.18%.

material on record. The ld. A/R of the assessee has submitted that after rejection of

books of account the AO has applied the N.P. rate of 6.50% without any proper and

reasonable basis. The AO has even not considered any comparable case or past history

of the assessee. He has submitted that the N.P. rate declared by the assessee for the

year under consideration is higher than the preceding year. Therefore, no addition is

called for on this account. He has also pointed out that this Tribunal in case of assessee’s sister concern vide order dated 31st December, 2019 has considered this

8 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

issue and decided in favour of the assessee. He has relied upon the order of the

Tribunal in case of M/s. Dynamic Engineers Vs. ACIT (supra).

rate for estimating the income of the assessee while framing the assessment under

section 144 read with section 145(3) of the IT Act. Therefore, the said rate is very

reasonable and proper in view of the provisions of presumptive tax under section 44AD

of the IT Act which provides the rate of profit at 8%. He has relied upon the orders of

the authorities below.

outset we note that an identical issue has been considered by the Tribunal in the case

of sister concern of the assessee, namely, M/s. Dynamic Engineers Vs. ACIT (supra) vide order dated 31st December, 2019 in para 8 as under :-

“8. We have considered the rival submissions as well as the relevant material on record. There is no dispute that after rejecting the books of account under section 145(3) of the Act, the income of the assessee is required to be estimated on some reasonable and proper basis. The past history of GP declared by the assessee is a proper guidance for estimation of income in pursuant to the rejection of books of account. In the case in hand, the assessee has declared GP at 11.06%. The assessee also furnished the comparative details of GP declared by the assessee for the preceding years including current year as under :-

9 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

Particulars FY 2007-08 FY 2008-09 FY 2009-10 Sales 9,86,19,448 8,59,02,816 8,08,18,835 Gross Profit 1,18,33,739 92,70,173 89,37,103 Net Profit before interest and 55,15,568 51,64,667 41,17,011 remuneration to partners. GP Ratio 11.99% 10.79% 11.06%

For the assessment year 2008-09 the assessee declared GP at 11.99%, for the assessment year 09-10 the assessee declared GP at 10.79%. However, there was an addition made by the AO and after the addition sustained by the ld. CIT (A), the GP for the assessment year 2009-10 comes to 11.02%. Therefore, even if taking the average of preceding two years which comes to 11.05%, the GP declared by the assessee at 11.06% cannot be said to be at the lower side or any significant decline in GP. Accordingly in the facts and circumstances of the case, when the assessee has declared the GP in line with the past history of the assessee which has attained the finality, the adoption of GP rate by the AO without any basis cannot be accepted. Hence the trading addition made by the AO is deleted.”

In the case of the assessee, the AO while estimating the income of the assessee has

applied the Net Profit rate of 6.50% for the assessment year 2010-11, 8.50% for the

assessment years 2012-13 and 13-14. The AO has not made any efforts to find out the

comparable rate of NP in identical business or otherwise prevailing rate in this business

as carried out by the assessee. Even the AO has not considered the assessee’s own

Net Profit declared in the preceding year which was not disputed by the Department,

accordingly the adoption of NP rate @ 6.5% and 8.5% respectively without any basis or

10 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

comparative instances is not justified. Hence, following the earlier order of this Tribunal

in the case of M/s. Dynamic Engineers Ltd. Vs. ACIT (supra), the trading addition made

by the AO is deleted.

2 as under :-

“ 2. On the facts and in the circumstances of the case, the ld. Commissioner of Income Tax (Appeals) Kota erred in confirming the action of the AO by making separate additions of Rs. 60000/- on account of administration expenses received, Rs. 16,725/- on account of consultancy charges received and Rs. 9123/- on account of sundry balance written off (total Rs. 85848/-) vide his order dated 26.03.2019 (Ground Number 2 of ground of appeal filed before CIT (A).”

Other Sources. The AO noted that apart from the business income, the assessee has

also received other income on account of administrative expenses, sundry balances

written off and consultancy charges. The AO after estimation of the income by applying

N.P rate has also made a separate addition of this amount of Rs. 85,848/-.

material on record. Since the addition made by the AO on account of trading income

based on net profit rate applied by the AO has been deleted and the income declared

by the assessee is accepted while deciding the ground no. 1, then no separate addition

on account of this income which are already part of the Profit & Loss account and

11 ITA No. 871, 859 & 860/JP/2019. M/s. Dynamic Engineers Infratrack Pvt. Ltd., Kota.

considered in the total income declared by the assessee in the return of income is called

for. Hence the addition made on this account is deleted.

Order is pronounced in the open court on 04/08/2020.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

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