M/S DREAMAX INFRA DEVELOPERS PVT. LTD.,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-6, JAIPUR

vkns'k@ ORDER PER: R.C. Sharma, A.M.

These appeals filed by the assessee are against two different orders of ld. CIT(A)-2, Jaipur dated 20.12.2018 and 08-11-2018 for the A.Ys. 2013-14 and 2014-15, in the matter of orders passed by the A.O.

143(3) of the Income Tax Act, 1961 (in short, the Act). The grounds taken by the assessee in both the assessment years are as under:-

ITA No.159&160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur – A.Y. 2013-14 ‘’1. On the facts and in the circumstances and in law the ld. CIT(A) erred in confirming the action of AO regarding rejecting the books of accounts of assessee by invoking the provisions of Section 145(3) of the Act.

2. On the facts and in the circumstances and in law the ld. CIT(A) erred in confirming the addition of Rs.28,68,475/- out of total addition of Rs.38,06,768/- made by the AO. The ld. CIT(A) further erred in confirming the action of AO regarding applying the Net Profit Rate (before depreciation and interest) @ 8% on gross construction receipt of the assessee.

3. On the facts and in the circumstances and in law the ld. CIT(A) erred in confirming the ld. CIT(A) erred in confirming the addition of Rs.73,780/- which was made by the AO u/s 2(24)(x) read with section 36(1)(va) of Income Tax Act, 1961 on account of late deposit of employee contribution to EPF more so the same was deposited by the assessee before filing return of income u/s 139(1) of the Act. However, no separate addition was made by AO in the total income of assessee on this account as the profit was estimated by applying NP Rate.

ITA No.161/JP/2019 – A.Y. 2014-15 ‘’1. On the facts and in the circumstances and in law the ld. CIT(A) erred in confirming the action of AO regarding rejecting the books of accounts of assessee by invoking the provisions of Section 145(3) of the Act.

2.1 Common grounds have been taken by the assessee in both the assessment years under consideration which relate to AO’s action against rejection of books of account and disallowance of expenses.

2.2 Rival Contentions have been heard and records perused. Brief facts of the case are that the assessee company is engaged in infrastructure and industrial projects viz Road, Industrial Township, Security Barracks etc.

Upto AY 2012-13, the same business was carried out under the status of Partnership firm M/s Dreamax Infrastructure Developers. The assessee company is a private limited incorporated on 24th Day of April 2012 and In AY 2013-14, the business of the said partnership firm was taken over by the company. During the financial year relevant to assessment year under consideration, assessee company was undertaken road and industrial township project of M/s Lafarge India Private Limited for their green field cement project at Nimbahera tehshil in district of Chittorgarh and highway road project at Pune of M/s ILFS Engineering & Construction Company &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur Limited. The assessee company had left the Pune project due to non-viability and geographical limitation in same year. During the scrutiny, assessee company has submitted all requisite information, produced books of accounts and explanations as sought by the AO time to time however, finally AO rejected books of account by invoking of section 145(3) of the Income Tax Act, 1961 on the ground that:-

(i) Total Labour expenses are of Rs. 86,77,822/- and most of labour payments are in cash; hence not verifiable

(ii) In respect of material also some expenses have been paid in cash and supported by internal vouchers hence not verifiable.

2.3 The AO in his order u/s 143(3) of the Act estimated income from contract @ of 8% of contract received subject to separately allowable depreciation and interest which was calculated at Rs. 60,77,860/-. However while computing the estimated income from contract, the AO allowed interest expenses at Rs. 29,84,683/- as against finance cost of Rs. 40,75,834/- claimed by the assessee and he separately assessed the income from consultancy at Rs. 3,01, 371/- and interest from FDR Rs. 9,38,293/-. He further held that an amount of Rs. 73,780/- is not allowable &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur u/s 36(1)(va) r.w.s 2(24)(x) on account of late deposit of EPF Contribution of employees. However, he has not made separate addition for this amount since he estimated the profit by applying NP rate. In this way the AO assessed income on estimated basis at Rs. 73,17,520/- against the declared income of Rs. 35,10,760/-, resultantly addition of Rs. 37,99,760/- was made.

2.4 By the impugned order, the ld. CIT(A) upheld the rejection of books of account by holding that the facts of this year are different than last year.

She further upheld the estimation of the profit by applying 8% of NP rate subject to interest and depreciation. However she directed to treat the interest on FDR of Rs. 9,38,293/- as business income. Further, the ld. CIT(A) confirmed the disallowance of Rs. 73,780/- made by the AO on account of late deposit of EPF contribution of employees.

2.5 Now the assessee is in further appeal before us.

2.6 At the outset of the hearing, the ld. AR of the assessee placed on record the order of the Tribunal in assessee’s own case for the immediately preceding assessment year 2012-13 in dated 25-05-2018 where similar issue was decided by the Tribunal in assessee’s favour. 5 &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur 2.7 We have considered the rival contentions and carefully gone through the orders of the authorities below as well as the order of the Tribunal in assessee’s own case. We find that upto A.Y 2012-13 the contract business was carried on under partnership firm in the name and style M/s Dreamax Infrastructure Developers. The business of partnership firm was taken over by this company from A.Y 2013-14. In A.Y 2012-13, books of accounts were rejected and the profit was estimated by applying NP rate. The ITAT Jaipur Bench held that insignificant defects in supporting evidence cannot a reason for rejection of books of accounts and held that the assessee's case does not warrant rejection of books of account u/s 145(3). The findings of ITAT is in para 5. The assessee is maintaining same set of books of account and the facts of this year are similar to A.Y 2012-13. s.no Grounds taken for rejection of books of account for Grounds taken for rejection AY 2012-13 of books of account for AY 2013-14 1 Expenditure on account of wages were incurred in Same ground is in A.Y cash and not verifiable 2013-14 2 Very low GP Some of material has been purchased in cash and supported by internal vouchers 3 Separate trading account of each contact work not No such ground in A.Y maintained 2013-14 &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur 4 Expenditure on account of wages was mostly No such ground in A.Y incurred during the period from December to March 2013-14 whereas the contract receipts throughout the year 5 Assessee gave major work to sub contractor No such ground in A.Y without having written agreement 2013-14

Therefore, the assessee's case is fully covered by decision of Hon'ble ITAT in its own case i.e. M/s Dreamax Infrastructure Developers for A.Y

2012-13.

2.8 On merit, we observed that most of labour expenses were paid in cash but it is not tantamount that the expenses paid in cash are not verifiable. It is known practice not only in assessee industry but in all industries that the wages paid in cash on fixed dates or regular interval due to their own nature. The assessee has also adopted the same practice and wages paid monthly. The company has claimed Rs. 86.78 lacs only towards labour expenses which was represents only 7.13% of total gross receipts of construction business. Further, the company account was also subject to statutory audit under the Company Act, 1956 and also tax audited under the Income Tax Act, 1961.

2.9 From the record, we found that the company has already produced books of accounts including supporting documents. In fact, assessee has &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur maintained complete records of labour expenses in the shape of wages sheets and payment thereof which was produced during assessment proceeding having details of:

• Name of labour • Designation or nature of work where labour engaged • Father or husband name • Date of birth • Date of joining • Sex • Gross wages rate per day • Number of day attended or labour worked in the month • Gross wages payable in a month • Deduction of PF • Net wages payable • Details of employer contribution towards PF • Receipts of amount paid to labour on vouchers During the year under consideration, there were more than two thousands of transaction of payment and each transaction supported by wages sheet containing information as mentioned above (supra) and payment vouchers.

A sample copy of wages sheet is placed on record.

2.10 Moreover the assessee company also registered with the PF Department and the same expenses was subject to verification by labour department. It is also worthwhile to note that the same wages have already been verified by the labour department/ awarder time to time. The copy of inspection and observation report carried out by relevant department is placed on record wherein no deficiency was observed by the &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur inspection team except petty issues. The company has also submitted PF return to labour department which itself substance the claim of wages payment on those cases where the PF applicable. Hence, merely payment made in cash is not tantamount that these expenses are not verifiable.

2.11 From the record, we also found that the company had purchased material amounting Rs. 10.81 Crore from various vendors and all payments were paid through banking channel except amount of Rs. 13,87,988/- which was paid in cash in compare to total gross receipts of the company of Rs. 12.16 Crore in AY 2013-14. This constitutes 1.15% only of total revenue and 1.30% of total material purchased by the assessee Company. On very few occasion, assessee Company has purchased few materials locally on urgent basis in cash or part payment made for the same in cash which constitutes 1.15% only of total revenue and 1.30% of total material purchased by the assessee Company during the relevant year. These materials were used in projects only. The material purchased in cash or part payment made in cash is fully supported by invoices or vouchers. The same invoices were produced during the assessment proceeding. Each payment duly supported by the external &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur invoices. Hence, this is incorrect contention that these are supported by internal vouchers only.

2.12 In view of the above, the rejection of books of account on the basis of insignificant defects in all respect, is not justified and books of account deserves to be accepted. Before invoking the provisions of Section 145(3) of the Act, the AO has to bring on record material on the basis of which he has arrived at the conclusion with regard to correctness or completeness of the accounts of the assessee or the method of accounting employed by it.

In the instant case, it was not the case that the assessee had not followed either cash or mercantile system of accounting. It was also not the case that the Central Government had notified any particular accounting standard not followed by assessee. Hence, the second part of sub-section (3) of section 145 would not apply to the instant case.

3.1 Ground No. 2 relates to confirming the addition of Rs. 28,68,475/- on estimation basis by applying NP rate of 8% subject to depreciation and interest.

3.2 In this regard, we observed that the assessee came in this business since AY 2012-13. In AY 2012-13. This business was carried out under the status of partnership. The assessee was awarded the contracts by private 10 &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur parties and the assessee accepted the contract just to create an existence in market as the assessee was new in the field i.e. experience of 1 year only in the field. Due to this, Govt contracts were not awarded to the assessee. The main reason of low profit was accepting the work order at most competitive rates to settle in the market. The AO assessed estimated income @ 8% of gross contractual receipts after deducting consultation receipt and he allowed depreciation fully but allowed interest to the extent of Rs. 29,84,683/- instead of Rs. 40,75,834/-. Beside above, he also made addition separately for income from consultancy receipt derived from the same 'rejected' books of account and interest income.

3.3 From the record, we found that the assessee company declared income of Rs. 35,10,760/- after depreciation of Rs. 5,31,296/- and finance or interest expenses of Rs. 40,75,834/-. Thus, company has shown gross income of Rs. 81,17,890/- i.e. 6.68% of gross contractual receipt of Rs. 12,16,08,395/- which is significant looking to second year of the operation in the contract business and particularly when the contracts were awarded by private parties in remote area.

3.4 Accordingly, there is no justification for estimation of income made by the AO @ 8% of gross contractual receipts. 11 &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur 3.5 The AO considered the separate receipts of Rs 16,84,500/-on account of consultancy income and estimated income after deduction of certain expenses.

3.6 This issue is also covered by decision of Hon'ble ITAT in A.Y 2012-13.

The findings of ITAT Jaipur Bench is at page 10 of the order. The relevant part is reproduced as under:-

"... The Assessing Officer has separately treated the income from liasioning and consultancy though the work of getting NOC from NHA for construction of road and dealing with local villagers in respect of the lands are part and partial of the work order and scope of the work order under the same contract. Therefore, for the purpose of computing the profit ratio of the assessee the entire receipt under the contract in question has to be considered..."

3.7 The AO allowed interest to the extent of Rs. 29,84,683/- instead of Rs. 40,75,834/-.

3.8 In this regard, we observed that during the year under consideration, the assessee company has incurred finance cost of Rs. 40,75,834/- as under: &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur Interest 29,84,683/-

Bank Guarantee Charges 10,22,156/-

Processing Fees paid to Bank 38,202/- for obtaining limit Other Bank Charges 30,793/-

Total 40,75,834/- The AO has allowed deduction of Rs. 29,84,683/- only as interest cost instead of Rs. 40,75,834/- as shown above. We do not find any justification for allowing interest cost at Rs.29,84,683/- in place of Rs.40,75,834/-.

3.9 Accordingly, we direct the AO to allow deduction of 40,75,384/- instead of Rs. 29,84,683/- as interest cost while income derived according to net profit formula.

3.10 We also observed that the profit declared by the assessee is @ 6.62% (calculation chart is as below) subject to Finance cost and depreciation which is most reasonable considering the fact that (i) the assessee is new in this business (ii) contract was awarded by private party (iii) in road construction contract there is cut throat competition, (iv) the location of the work in very remote area and (v) the assessee left the Pune project awarded by M/s ILFS Engineering And Construction Company Limited due to non-viability and geographical limitation in same year.

&160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur Total contract receipt considered by AO 11,99,22,995 Add: - Consultation Receipt (Para 2.6.1) 16,85,400 Add: -Interest Income on Bank FDR (Para 2.6.3) 9,38,293 Total Contract Receipt 12,25,46,688 NP @ 6.62% 81,12,591 Less: - Depreciation 5,31,296 Less: - Total Finance cost including interest Exp. (2.6.3 read with Para 2.6.2) 40,75,384 Total Income or Net Profit 35,05,911 Income declared by the assessee in return 35,10,760 4.1 The AO has also made disallowance of Rs. 73,780/- treating the late deposit of employee contribution as income u/s 2(24)(x) read with section 36(1)(va) of the Income Tax Act, 1961.

4.2 It is clear that entire contributions received from the employees have been deposited before filing of return of income u/s 139(1) of the Act.

Accordingly, no disallowance is warranted in terms of following judicial pronouncements.

(i) Hon’ble Rajasthan High Court in the case of Commissioner Of Income Tax Vs. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. (2014) 366 ITR 163 (Raj) (ii) CIT Vs State Bank of Bikaner & Jaipur [2014] 363 ITR 70 (Rajasthan) (iii) Commissioner of Income-tax v. Jaipur Vidyut Vitran Nigam Limited [2014] 49 taxmann.com 540 (Rajasthan) (iv) Allied Motors Pvt. Ltd. Vs. CIT 224 ITR 677 (SC); 298 ITR 141 (Kar) (v) 2015 (1) TMI 974 – Gujarat high court in the case of CIT V/s Noble Detective & Security Services Pvt. Ltd Appeal No. 251 of 2007 and (vi) CIT v/s Aimil Ltd & Ors (2010) 229 CTR (Del) 418. (vii) The Hon’ble ITAT Jaipur Bench in the case of ACIT Circle-6, Jaipur Vs Kanhaiya Lal Kalyanmal & 136/JP/2013 vide order dated 26/01/2014 5.0 In the result, the appeal of the assessee is allowed. &160/JP/2019 M/s. Dreamax Infra Developers Pvt. Ltd. Vs ACIT, Circle-6, Jaipur 6.0 The facts and circumstances during the assessment year 2014-15 are pari materia as agreed by both the ld. AR and ld. DR. Accordingly, in view of the above discussions, we do not find any justification for the additions so made.

7.0 In the result, both the appeals of the assessee are allowed.

Order pronounced in the open court on 11 /08/2020.